Certain Employee Remuneration in Excess of $1,000,000 Under Internal Revenue Code Section 162(m)
| Published date | 20 December 2019 |
| Citation | 84 FR 70356 |
| Record Number | 2019-26116 |
| Section | Proposed rules |
| Court | Internal Revenue Service |
Federal Register, Volume 84 Issue 245 (Friday, December 20, 2019)
[Federal Register Volume 84, Number 245 (Friday, December 20, 2019)]
[Proposed Rules]
[Pages 70356-70391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26116]
[[Page 70355]]
Vol. 84
Friday,
No. 245
December 20, 2019
Part IVDepartment of the Treasury-----------------------------------------------------------------------Internal Revenue Service-----------------------------------------------------------------------26 CFR Part 1 Certain Employee Remuneration in Excess of $1,000,000 Under Internal
Revenue Code Section 162(m); Proposed Rule
Federal Register / Vol. 84, No. 245 / Friday, December 20, 2019 /
Proposed Rules
[[Page 70356]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-122180-18]
RIN 1545-BO95
Certain Employee Remuneration in Excess of $1,000,000 Under
Internal Revenue Code Section 162(m)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document sets forth proposed regulations under section
162(m) of the Internal Revenue Code (Code), which limits the deduction
for certain employee remuneration in excess of $1,000,000 for federal
income tax purposes. These proposed regulations implement the
amendments made to section 162(m) by the Tax Cuts and Jobs Act. These
proposed regulations would affect publicly held corporations. This
document also provides a notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by February 18,
2020. Outlines of topics to be discussed at the public hearing
scheduled for March 9, 2020, at 10 a.m. must be received by February
18, 2020.
ADDRESSES: Submit electronic submissions via the Federal eRulemaking
Portal at www.regulations.gov (indicate IRS and REG-122180-18) by
following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment received to
its public docket, whether submitted electronically or in hard copy.
Send hard copy submissions to: CC:PA:LPD:PR (REG-122180-18), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
122180-18), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations,
Ilya Enkishev at (202) 317-5600; concerning submissions of comments,
the hearing, and/or being placed on the building access list to attend
the hearing, Regina Johnson at (202) 317-6901 (not toll-free numbers)
or [email protected].
SUPPLEMENTARY INFORMATION:
Background
This document sets forth proposed amendments to the Income Tax
Regulations (26 CFR part 1) under section 162(m). Section 162(m)(1)
disallows the deduction by any publicly held corporation for applicable
employee remuneration paid with respect to any covered employee to the
extent that such remuneration for the taxable year exceeds $1,000,000.
Section 162(m) was added to the Code by section 3211(a) of the Omnibus
Budget Reconciliation Act of 1993, Public Law 103-66. Proposed
regulations under section 162(m) were published in the Federal Register
on December 20, 1993 (58 FR 66310) (1993 proposed regulations). On
December 2, 1994, the Treasury Department and the IRS issued amendments
to the proposed regulations (59 FR 61884) (1994 proposed regulations).
On December 20, 1995, the Treasury Department and the IRS issued final
regulations under section 162(m) (TD 8650) (60 FR 65534) (final
regulations).
Section 162(m) was amended by section 13601 of the Tax Cuts and
Jobs Act (TCJA) (Pub. L. 115-97, 131 Stat. 2054, 2155 (2017)). Section
13601 of TCJA amended the definitions of covered employee, publicly
held corporation, and applicable employee remuneration in section
162(m). Section 13601 also provided a transition rule applicable to
certain outstanding compensatory arrangements (commonly referred to as
the grandfather rule).
On August 21, 2018, the Treasury Department and the IRS released
Notice 2018-68 (2018-36 I.R.B. 418), which provides guidance on certain
issues under section 162(m). Specifically, the notice provides guidance
on the amended rules for identifying covered employees. Furthermore,
the notice provides guidance on the operation of the grandfather rule,
including when a contract will be considered materially modified so
that it is no longer grandfathered. Notice 2018-68 requested comments
on the following issues:
The application of the definition of publicly held
corporation to foreign private issuers, including the reference to
issuers that are required to file reports under section 15(d) of the
Securities Exchange Act of 1934,
the application of the definition of covered employee to
an employee who was a covered employee of a predecessor of the publicly
held corporation,
the application of section 162(m) to corporations
immediately after they become publicly held either, through an initial
public offering or a similar business transaction, and
the application of the Securities and Exchange Commission
(SEC) executive compensation disclosure rules for determining the three
most highly compensated executive officers for a taxable year that does
not end on the same date as the last completed fiscal year.
In drafting these proposed regulations, the Treasury Department and
the IRS have considered all comments received on the notice. See Sec.
601.601(d)(2)(ii)(b). Commenters noted that the many examples in Notice
2018-68 were helpful in illustrating the guidance in the notice. In
light of these comments, the Treasury Department and the IRS have
included numerous examples in these proposed regulations to illustrate
the proposed rules.
Explanation of Provisions
I. Overview
Section 13601 of TCJA significantly amended section 162(m). This
document adds a section to the Income Tax Regulations (26 CFR part 1)
to reflect these amendments. The amended section 162(m) applies to
taxable years beginning after December 31, 2017, except to the extent
the grandfather rule applies. Because the final regulations continue to
apply to deductions related to amounts of remuneration that are
grandfathered, the final regulations are retained as a separate section
in the Income Tax Regulations under section 162(m).
II. Publicly Held Corporation
A. In General
Section 162(m)(2) defines the term ``publicly held corporation.''
Before the amendments made by section 13601(c) of TCJA, section
162(m)(2) defined publicly held corporation as any corporation issuing
any class of common equity securities required to be registered under
section 12 of the Securities Exchange Act of 1934 (Exchange Act). In
defining a publicly held corporation, Sec. 1.162-27(c)(1) adds that
whether a corporation is publicly held is determined based solely on
whether, as of the last day of its taxable year, the corporation is
subject to the reporting obligations of section 12 of the Exchange Act.
Section 13601(c) of TCJA amended the definition of publicly held
corporation in section 162(m)(2) to
[[Page 70357]]
provide that the term means any corporation which is an issuer (as
defined in section 3 of the Exchange Act) the securities of which are
required to be registered under section 12 of the Exchange Act, or that
is required to file reports under section 15(d) of the Exchange Act.
Thus, section 13601(c) of TCJA expanded the definition of publicly held
corporation in two ways to include: (1) A corporation with any class of
securities (rather than only a class of common equity securities) that
is required to be registered under section 12 of the Exchange Act, and
(2) a corporation that is required to file reports under section 15(d)
of the Exchange Act.
The proposed regulations similarly define a publicly held
corporation as any corporation that issues securities required to be
registered under section 12 of the Exchange Act or that is required to
file reports under section 15(d) of the Exchange Act. Unlike the final
regulations, the proposed regulations do not focus on whether the
corporation is subject to the reporting obligations of section 12 of
the Exchange Act. Rather, tracking the statutory text as amended, the
proposed regulations focus on whether a corporation's securities are
required to be registered under section 12, or whether a corporation is
required to file reports under section 15(d).
Consistent with the statutory expansion of section 162(m), Congress
provided in the legislative history to TCJA that the definition of a
publicly held corporation ``may include certain additional corporations
that are not publicly traded, such as large private C or S
corporations.'' H. Rep. 115-466, at 490 (2017) (Conf. Rep.). See also
Staff of the Joint Committee on Taxation, General Explanation of Public
Law 115-97 (Blue Book), at 261 (December 20, 2018). As a result, these
proposed regulations make clear that an S corporation (as defined in
section 1361(a)(1)) would qualify as a publicly held corporation if it
(1) issues securities required to be registered under section 12(b) of
the Exchange Act, or (2) is required to file reports under section
15(d) of the Exchange Act (for example, because the S corporation has
issued publicly traded debt). See Proposed Sec. 1.162-33(c)(1)(i).
Accordingly, the proposed regulations also provide that an S
corporation parent of a qualified subchapter S subsidiary (as defined
in section 1361(b)(3)(B)) (QSub) that issues securities required to be
so registered, or is required to file such reports, likewise would
qualify as a publicly held corporation. See part II.G of this
Explanation of Provisions section. See also Proposed Sec. 1.162-
33(c)(1)(iv).
For ease of administration, the proposed regulations follow the
approach in the final regulations and use the last day of a
corporation's taxable year to determine whether it is publicly held.
Accordingly, the proposed regulations provide that a corporation is
publicly held if, as of the last day of its taxable year, its
securities are required to be registered under section 12 of the
Exchange Act or it is required to file reports under section 15(d) of
the Exchange Act.
A corporation is required to register its securities under section
12 of the Exchange Act in two circumstances. First, section 12(b) of
the Exchange Act requires a corporation to register its securities in
order to list them for trading on a national securities exchange (15
U.S.C. 78l(b)). Second, section 12(g) of the Exchange Act requires an
issuer with total assets exceeding $10 million to register a class of
equity securities that is held of record by either 2,000 or more
persons, or 500 or more persons who are not accredited investors (as
that term is defined by the SEC) (15 U.S.C. 78l(g)).\1\
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\1\ In the case of an issuer that is a bank, savings and loan
holding company, or bank holding company, section 12(g) of the
Exchange Act requires registration if the issuer has assets
exceeding $10 million and a class of equity securities held of
record by 2,000 or more persons. See Exchange Act Rule 12g-1 (17 CFR
240.12g-1) regarding the requirements of section 12(g) generally,
and Exchange Act Rule 12g5-1 (17 CFR 240.12g5-1) for determining
record ownership of securities for purposes of Exchange Act sections
12(g) and 15(d).
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A corporation is required to file reports under section 15(d) of
the Exchange Act when it offers securities for sale in a transaction
subject to the registration requirements of the Securities Act of 1933
(Securities Act) and its registration statement is declared effective
by the SEC. A corporation's section 15(d) filing obligation is
automatically suspended when certain statutory requirements are met,
and a corporation that meets other requirements established by rule may
file a form with the SEC to suspend its section 15(d) filing
obligation.\2\ A commenter suggested that a corporation should not be
considered publicly held if its obligation to file reports under
section 15(d) of the Exchange Act is suspended. The proposed
regulations adopt this suggestion.
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\2\ See Exchange Act Section 15(d) (15 U.S.C. 78o(d)), and
Exchange Act Rules 15d-6 (17 CFR 240.15d-6) and 12h-3 (17 CFR
240.12h-3).
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In defining the term publicly held corporation under pre-amended
section 162(m)(2), the final regulations included examples illustrating
whether a corporation, as of the last day of its taxable year, is
subject to the reporting obligations of section 12 of the Exchange Act.
Similarly, these proposed regulations include examples illustrating
when a corporation, as of the last day of its taxable year, is either
required to file reports under section 15(d) of the Exchange Act or
required to register its securities under section 12 of the Exchange
Act. Even though the examples in these proposed regulations illustrate
the application of the Securities Act and the Exchange Act and the
rules thereunder (17 CFR part 240) for purposes of section 162(m), the
examples are not intended to provide any guidance on how an issuer
should apply the requirements of the Securities Act, the Exchange Act,
and the rules thereunder (17 CFR part 240). Questions regarding those
requirements should be directed to the SEC.
B. Subsidiaries That File Reports Under Section 15(d) of the Exchange
Act
Pursuant to the definition of publicly held corporation in the
proposed regulations, a corporation is publicly held if, as of the last
day of its taxable year, it is required to file reports under section
15(d) of the Exchange Act. A commenter suggested that if a wholly-owned
subsidiary corporation of a publicly held corporation subject to
section 162(m) is required to file reports under section 15(d) of the
Exchange Act, then it should not be considered a publicly held
corporation separately subject to section 162(m) because its parent
corporation is already subject to section 162(m). According to the
commenter, to consider the subsidiary a publicly held corporation would
result in two sets of covered employees--one for the parent corporation
and one for the subsidiary corporation. The commenter was concerned
that there would be too many covered employees for the group of
corporations. The proposed regulations do not adopt this suggestion
because not treating the subsidiary corporation as a separate publicly
held corporation is inconsistent with the text of amended section
162(m)(2), which defines a publicly held corporation as a corporation
that is required to file reports under section 15(d) of the Exchange
Act. This conclusion is consistent with the affiliated group rule in
the final regulations (which is retained in these proposed regulations
and discussed in section II.E of this preamble) providing that a
publicly held subsidiary is separately subject to section 162(m) and,
therefore, has its own set of covered employees.
[[Page 70358]]
C. Foreign Private Issuers
Foreign issuers \3\ may access the U.S. capital markets to raise
capital or establish a trading presence for their securities. There are
specific rules under the Federal securities laws that apply if a
foreign issuer meets the regulatory definition of ``foreign private
issuer'' (FPI). ``Foreign private issuer'' is defined in 21 CFR 240.3b-
4(c). A foreign private issuer is any foreign issuer other than a
foreign government, except for an issuer that has (1) more than 50% of
its outstanding voting securities held of record by U.S. residents and
(2) any of the following: (i) A majority of its officers and directors
are citizens or residents of the United States, (ii) more than 50% of
its assets are located in the United States, or (iii) its business is
principally administered in the United States.
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\3\ The term ``foreign issuer'' means any issuer which is a
foreign government, a national of any foreign country or a
corporation or other organization incorporated or organized under
the laws of any foreign country. 21 CFR 240.3b-4(b).
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A FPI may access the U.S. capital markets or establish a trading
presence in the U.S. by offering or listing its securities, often in
the form of American Depositary Receipts (ADRs). An ADR is a negotiable
certificate that evidences ownership of a specified number (or
fraction) of the FPI's securities held by a depositary (typically, a
U.S. bank). Depending on the FPI's level of participation in the U.S.
capital market or trading presence, the FPI may be required to register
its deposited securities (underlying the ADRs) under section 12 of the
Exchange Act.
Commenters recommended that the proposed regulations provide that
section 162(m) does not apply to FPIs. Before TCJA, the IRS ruled in
several private letter rulings that section 162(m) does not apply to
FPIs because FPIs are not required to file a summary compensation table
pursuant to the reporting obligations under the Exchange Act.\4\ The
rationale of the rulings is that section 162(m) does not apply to FPIs
because they do not have covered employees as a result of not being
required to file a summary compensation table with the SEC. Commenters
suggested that section 162(m) should continue to be inapplicable to
FPIs because they are not required to disclose compensation of their
officers on an individual basis under the Exchange Act, unless that
disclosure is required by their home country. The commenters asserted
that determining compensation on an individual basis (in order to
determine the three most highly compensated executive officers) would
require the FPIs to expend significant time and money in adopting the
necessary internal legal and compliance procedures to comply with the
Exchange Act requirements that are otherwise inapplicable to them.
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\4\ A private letter ruling may be relied upon only by the
taxpayer to whom the ruling was issued, and does not constitute
generally applicable guidance. See section 11.02 of Revenue
Procedure 2019-1, 2019-01 I.R.B. 157.
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The proposed regulations do not adopt the recommendation to exclude
FPIs from the application of section 162(m). Pursuant to the definition
of publicly held corporation in amended section 162(m)(2), a FPI is a
publicly held corporation if it is required either to register its
securities under section 12 of the Exchange Act or to file reports
under section 15(d) of the Exchange Act. The legislative history to
TCJA indicates that Congress intended for section 162(m) to apply to
FPIs.\5\ Furthermore, the rationale of the private letter rulings,
which conclude that section 162(m) does not apply to FPIs because they
are not required to file a summary compensation table, is inconsistent
with the definition of covered employee in amended section 162(m)(3).
As discussed in section III of this preamble, under the definition of
covered employee as amended by TCJA, a publicly held corporation has
covered employees regardless of whether it is required to file a
summary compensation table, and regardless of whether the employees
appear on a summary compensation table that is filed. Accordingly, the
proposed regulations do not adopt the suggestion to exclude FPIs from
the application of section 162(m). The proposed regulations include
examples illustrating when a FPI is a publicly held corporation.
Because the calculation of compensation to determine the three highest
compensated executive officers for a taxable year is made in accordance
with the SEC executive compensation disclosure rules under the Exchange
Act, the Treasury Department and the IRS request comments on whether a
safe harbor for that determination is appropriate for FPIs that are not
required to disclose compensation of their officers on an individual
basis in their home countries and, if so, how that safe harbor should
be designed.
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\5\ The legislative history to TCJA provides that the amendment
to the definition of publicly held corporation under section 162(m)
``extends the applicability of section 162(m) to include . . . all
foreign companies publicly traded through ADRs.'' House Conf. Rpt.
115-466, 489 (2017). The Blue Book similarly states that ``the
provision extends the applicability of section 162(m) to include all
foreign companies publicly traded through ADRs.'' Blue Book at page
261.
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D. Publicly Traded Partnerships
Partnerships may issue equity interests that are required to be
registered under section 12 of the Exchange Act because they are traded
on an established securities market. These partnerships are known as
publicly traded partnerships (PTPs). Under section 7704(a), a PTP
generally is treated as a corporation for purposes of the Code, unless
its gross income meets the requirement of section 7704(c)(2).
Stakeholders have asked whether a PTP that is treated as a corporation
under that provision would be considered a publicly held corporation.
As described in the preamble to the 1993 proposed regulations,
stakeholders previously raised this issue:
Questions have arisen as to the application of section 162(m) to
certain master limited partnerships whose equity interests are
required to be registered under the Exchange Act and that, beginning
in 1997, may be treated as corporations for Federal income tax
purposes. Whether these partnerships would be publicly held
corporations within the meaning of section 162(m) and, if so, the
manner in which they would satisfy the exception for performance-
based compensation is currently under study and is not addressed in
these proposed regulations. If necessary, guidance as to the
application of section 162(m) to these entities will be provided in
the future.
(58 FR 66310, 66311). The Treasury Department and the IRS have
concluded that, for purposes of section 162(m), a PTP that is treated
as a corporation under section 7704 (or otherwise) is a publicly held
corporation if, as of the last day of its taxable year, its securities
are required to be registered under section 12 of the Exchange Act or
it is required to file reports under section 15(d) of the Exchange Act.
A PTP that is not treated as a corporation for Federal tax purposes
(for example, because it satisfies the gross income requirement under
section 7704(c)(2) and is not otherwise treated as a corporation for
Federal tax purposes) is not a publicly held corporation for purposes
of section 162(m).
E. Affiliated Groups
In defining the term ``publicly held corporation,'' Sec. 1.162-
27(c)(1)(ii) provides that a publicly held corporation includes an
affiliated group of corporations, as defined in section 1504
(determined without regard to section 1504(b)). The proposed
regulations retain this rule with a modification described below.
Because an affiliated group may include more
[[Page 70359]]
than one publicly held corporation, Sec. 1.162-27(c)(1)(ii) provides
that an affiliated group of corporations does not include any
subsidiary that is itself a publicly held corporation. In that case,
pursuant to the final regulations, the publicly held subsidiary and its
subsidiaries (if any) are separately subject to section 162(m).
Therefore, the parent corporation that is a publicly held corporation
and the publicly held subsidiary each has its own set of covered
employees. However, the final regulations do not specifically address
the situation in which a parent corporation is privately held and the
subsidiary is publicly held. Because the amended definition of publicly
held corporation includes a corporation that is required to file
reports under section 15(d) of the Exchange Act, this type of
affiliated group may be more common post-TCJA. Accordingly, unlike the
final regulations, which provide that a publicly held subsidiary is
excluded from an affiliated group, with the result that a privately
held parent is not part of an affiliated group with its publicly held
subsidiary, these proposed regulations provide that an affiliated group
includes a parent corporation that is privately held and its subsidiary
that is publicly held. Furthermore, because an affiliated group of
corporations is determined without regard to section 1504(b), an
affiliated group may also include a domestic parent corporation that is
publicly held and its foreign subsidiary that is not publicly held.
A covered employee of a publicly held corporation may also perform
services for another member of the affiliated group. In these
situations, Sec. 1.162-27(c)(1)(ii) provides that
[i]f a covered employee is paid compensation in a taxable year
by more than one member of an affiliated group, compensation paid by
each member of the affiliated group is aggregated with compensation
paid to the covered employee by all other members of the group. Any
amount disallowed as a deduction by this section must be prorated
among the payor corporations in proportion to the amount of
compensation paid to the covered employee by each such corporation
in the taxable year.
The proposed regulations retain this rule and include additional
rules addressing the proration of the deduction disallowance in
situations in which a covered employee is paid compensation in a
taxable year by more than one publicly held corporation in an
affiliated group. Under these rules, the amount disallowed as a
deduction is determined separately with respect to each publicly held
payor corporation of which the individual is a covered employee.
Accordingly, in determining the deduction disallowance with respect to
compensation paid to a covered employee by one publicly held payor
corporation of an affiliated group, compensation paid to the covered
employee by another publicly held payor corporation of the affiliated
group (of which the individual is also a covered employee) is not
aggregated for purposes of the deduction disallowance proration.
F. Disregarded Entities
Generally under Sec. 301.7701-2(c)(2)(i), a business entity that
has a single owner and is not a corporation under Sec. 301.7701-2(b)
is disregarded as an entity separate from its owner for Federal tax
purposes (disregarded entity). All of the activities of a disregarded
entity are therefore treated in the same manner as a sole
proprietorship or as a branch or division of its owner under Sec.
301.7701-2. Section 301.7701-2(c)(2)(iv) provides that Sec. 301.7701-
2(c)(2)(i) does not apply to taxes imposed under Subtitle C--Employment
Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and
25 of the Code). Because section 162(m) is in Subtitle A, the general
rule in Sec. 301.7701-2(c)(2)(i) applies for purposes of section
162(m).
Nonetheless, a disregarded entity that is owned by a privately held
corporation may be an issuer of securities that are required to be
registered under section 12(b) of the Exchange Act or may be required
to file reports under section 15(d) of the Exchange Act. The Treasury
Department and the IRS have concluded that, for purposes of section
162(m), a corporation that is the owner of a disregarded entity is
treated as issuing any securities issued by its disregarded entity.
Accordingly, if a disregarded entity that is owned by a privately held
corporation is an issuer of securities that are required to be
registered under section 12(b) of the Exchange Act or is required to
file reports under section 15(d) of the Exchange Act, these proposed
regulations treat the privately held corporation as a publicly held
corporation for purposes of section 162(m).
The Treasury Department and the IRS are aware that a corporation
could form a partnership with a minority partner in an attempt to
circumvent the proposed rules treating a corporation that wholly-owns a
disregarded entity that issues certain securities as a publicly held
corporation for purposes of section 162(m). In these circumstances, the
corporation may be treated as a publicly held corporation by reason of
the application of Sec. 1.701-2 or other federal income tax
principles. The Treasury Department and the IRS also note that, in
addition to the above-described fact pattern involving disregarded
entities, Sec. 1.701-2 and other federal income tax principles may
apply to any transaction in which a corporation forms a partnership in
an attempt to circumvent the proposed rules.
G. Qualified Subchapter S Subsidiaries
Section 1361(b)(3)(B) defines a QSub as any domestic corporation
that is not an ineligible corporation (as defined in section
1361(b)(2)) if an S corporation owns 100 percent of the stock of such
corporation and the S corporation elects to treat the corporation as a
QSub. Under section 1361(b)(3)(A), unless otherwise provided by
regulations, a QSub is not treated as a separate corporation, and
therefore all of its assets, liabilities, and items of income,
deduction, and credit are treated as assets, liabilities, and such
items (as the case may be) of its parent S corporation.
Like a disregarded entity, a QSub may issue securities required to
be registered under section 12(b) of the Exchange Act, or be required
to file reports under section 15(d) of the Exchange Act. The Treasury
Department and the IRS have concluded that, for purposes of section
162(m), an S corporation that is the owner of a QSub is treated as
issuing any securities that are issued by its QSub. Accordingly, if a
QSub is an issuer of securities that are required to be registered
under section 12(b) of the Exchange Act, or is required to file reports
under section 15(d) of the Exchange Act, these proposed regulations
treat the QSub's S corporation parent as a publicly held corporation
for purposes of section 162(m). See Proposed Sec. 1.162-33(c)(1)(iv).
III. Covered Employee
A. In General
Section 162(m)(3) defines the term ``covered employee.'' Before
TCJA, section 162(m)(3) defined a covered employee as any employee of
the taxpayer if (a) as of the close of the taxable year, such employee
is the chief executive officer of the taxpayer or is an individual
acting in such capacity, or (b) the total compensation of such employee
for the taxable year is required to be reported to shareholders under
the Exchange Act by reason of such employee being among the four
highest compensated officers for the taxable year (other than the chief
executive officer).
Section 13601(b) of TCJA amended the definition of covered employee
in section 162(m)(3) to provide that a
[[Page 70360]]
covered employee means any employee of the taxpayer if (a) the employee
is the principal executive officer (PEO) or principal financial officer
(PFO) of the taxpayer at any time during the taxable year, or was an
individual acting in such a capacity, (b) the total compensation of the
employee for the taxable year is required to be reported to
shareholders under the Exchange Act by reason of such employee being
among the three highest compensated officers for the taxable year
(other than the PEO and PFO), or (c) the individual was a covered
employee of the taxpayer (or any predecessor) for any preceding taxable
year beginning after December 31, 2016. Section 13601(c) of TCJA also
added flush language to provide that a covered employee includes any
employee whose total compensation for the taxable year places the
individual among the three highest compensated officers for the taxable
year (other than any individual who is the PEO or PFO of the taxpayer
at any time during the taxable year, or was an individual acting in
such a capacity) even if the compensation of the officer is not
required to be reported to shareholders under the Exchange Act.
The SEC executive compensation disclosure rules generally require
disclosure of compensation of the three most highly compensated
executive officers if they were employed at the end of the taxable year
and up to two executive officers whose compensation would have been
disclosed but for the fact that they were not employed at the end of
the taxable year. See Item 402 of Regulation S-K, 17 CFR 229.402(a)(3).
After TCJA amended the definition of covered employee, stakeholders
submitted comments indicating that they would benefit from initial
guidance on whether amended section 162(m)(3)(B) and the flush language
to section 162(m)(3) require an employee to be employed at the end of
the taxable year to qualify as a covered employee. Notice 2018-68
provided that a covered employee for any taxable year means any
employee who is among the three highest compensated executive officers
for the taxable year, regardless of whether the executive officer is
serving at the end of the publicly held corporation's taxable year, and
regardless of whether the executive officer's compensation is subject
to disclosure for the last completed fiscal year under the applicable
SEC rules. To reach this conclusion, consistent with Notice 2018-68,
the proposed regulations rely on the flush language to section
162(m)(3), the legislative history,\6\ and the SEC executive
compensation disclosure rules that do not necessarily require an
executive officer to be employed at the end of the fiscal year for his
or her compensation to be disclosed for the year. Based on these
considerations, the proposed regulations adopt the position set forth
in Notice 2018-68.\7\
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\6\ See House Conf. Rpt. 115-466, 489 (2017).
\7\ Furthermore, in explaining the amended definition of covered
employee, the Blue Book concurred with the guidance provided in
Notice 2018-68. Blue Book at page 260.
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B. Taxable Years Not Ending on Same Date as Fiscal Years
The SEC executive compensation disclosure rules are based on a
corporation's fiscal year. Usually, a corporation's fiscal and taxable
years end on the same date; however, this is not always the case (for
example, due to a short taxable year as a result of a corporate
transaction that does not result in a short fiscal year). In these
cases, the publicly held corporation will have three most highly
compensated executive officers under section 162(m)(3)(B) for the short
taxable year (instead of the fiscal year). In Notice 2018-68, the
Treasury Department and IRS requested comments on the application of
the SEC executive compensation disclosure rules to determine the three
most highly compensated executive officers for a taxable year that does
not end on the same date as the fiscal year for purposes of section
162(m)(3)(B). The notice provided that until additional guidance is
issued, taxpayers should base their determination of the three most
highly compensated executive officers for purposes of section
162(m)(3)(B) upon a reasonable good faith interpretation of the
statute.
A commenter suggested that the determination of the three highest
compensated executive officers should be based on the total amount of
otherwise deductible remuneration. The proposed regulations do not
adopt this approach. In defining covered employee, section 162(m)(3)(B)
provides that the three most highly compensated executive officers are
officers whose compensation is required to be (or would be required to
be) reported to shareholders under the Exchange Act. Therefore, under
the statutory text, the determination of the three most highly
compensated executive officers is made pursuant to the rules under the
Exchange Act. Accordingly, the proposed regulations provide that the
amount of compensation used to identify the three most highly
compensated executive officers is determined pursuant to the executive
compensation disclosure rules under the Exchange Act using the taxable
year as the fiscal year for purposes of making the determination. Thus,
for example, if a publicly held corporation uses a calendar year fiscal
year for SEC reporting purposes, but has a taxable year beginning July
1, 2019, and ending June 30, 2020, then the three most highly
compensated executive officers are determined for the taxable year
ending June 30, 2020, by applying the executive compensation disclosure
rules under the Exchange Act as if the fiscal year ran from July 1,
2019 to June 30, 2020. The same rule applies to short taxable years.
Assume in the previous example that, due to a corporate transaction,
the corporation's taxable year ran from July 1, 2019, to March 31,
2020. In that situation, the three most highly compensated executive
officers would be determined for the taxable year ending March 31, 2020
by applying the disclosure rules as if the fiscal year began July 1,
2019, and ended March 31, 2020. For a discussion of the proposed
special applicability dates related to the determination of the three
most highly compensated executive officers for a corporation whose
fiscal year and taxable year do not end on the same date, see section
VIII.B of this preamble.
C. Covered Employees Limited to Executive Officers
The SEC executive compensation disclosure rules require disclosure
of compensation for certain executive officers. The term executive
officer is defined in 17 CFR 240.3b-7 as follows:
The term executive officer, when used with reference to a
registrant, means its president, any vice president of the
registrant in charge of a principal business unit, division or
function (such as sales, administration or finance), any other
officer who performs a policy making function or any other person
who performs similar policy making functions for the registrant.
Executive officers of subsidiaries may be deemed executive officers
of the registrant if they perform such policy making functions for
the registrant.
Under the amended definition of covered employee, a PEO and PFO are
covered employees by virtue of having those positions or acting in
those capacities. The three highest compensated officers (other than
the PEO or PFO) are covered employees by reason of their compensation.
With respect to the three highest compensated officers for a taxable
year, a commenter asked whether only an executive officer (as defined
in 17 CFR 240.3b-7) may qualify as a covered employee. Because the SEC
executive compensation disclosure rules that
[[Page 70361]]
require disclosure of the three highest compensated executive officers
apply only to executive officers, only an executive officer may qualify
as a covered employee under section 162(m)(3)(B).
A publicly held corporation may own an interest in a partnership as
discussed in section IV.B. of this preamble. Consistent with the
definition of the term executive officer in 17 CFR 240.3b-7, an officer
of a partnership is deemed to be an executive officer of a publicly
held corporation that owns an interest in such partnership if the
officer performs a policy making function for the publicly held
corporation. As a deemed executive officer of the publicly held
corporation, the officer of the partnership may be a covered employee
under section 162(m)(3)(B) if the officer is one of the three highest
compensated executive officers of the publicly held corporation.
D. Covered Employees After Separation From Service
Consistent with section 162(m)(3)(C), as amended by TCJA, Notice
2018-68 provides that a covered employee identified for taxable years
beginning after December 31, 2016, will continue to be a covered
employee for all subsequent taxable years. Accordingly, if an
individual is a covered employee for a taxable year, the individual
remains a covered employee for all subsequent taxable years, even after
the individual has separated from service. For example, if a publicly
held corporation makes nonqualified deferred compensation (NQDC)
payments to a former PEO after separation from service, then the
deduction for the payments generally would be subject to section
162(m). Notice 2018-68 based this conclusion on the statutory text in
section 162(m)(3)(C) and the legislative history, which provides that
if an individual is a covered employee with respect to a
corporation for a taxable year beginning after December 31, 2016,
the individual remains a covered employee for all future years.
Thus, an individual remains a covered employee with respect to
compensation otherwise deductible for subsequent years, including
for years during which the individual is no longer employed by the
corporation and years after the individual has died.
(House Conf. Rpt. 115-466, 489 (2017)). The Blue Book reiterated the
legislative history in explaining the amended definition of covered
employee.\8\
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\8\ The Blue Book states that, ``[i]n addition, if an individual
is a covered employee with respect to a corporation for a taxable
year beginning after December 31, 2016, the individual remains a
covered employee for all future years. Thus, an individual remains a
covered employee with respect to compensation otherwise deductible
for subsequent years, including for years during which the
individual is no longer employed by the corporation and years after
the individual has died.'' Blue Book at page 260.
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One commenter suggested that a covered employee ceases to be a
covered employee for taxable years following the taxable year in which
the individual separates from service because the statutory text uses
the term ``employee'' instead of ``individual'' in defining covered
employee. In other words, the commenter asserted that the term
``employee'' in the statute should be interpreted as referring to a
``current employee'' instead of a ``current or former employee.'' The
commenter suggested that because this is the plain reading of the
statute, the legislative history should be ignored. The proposed
regulations do not adopt this suggestion. The statute gives no
indication that the term ``employee'' is limited to a current employee,
and a reference in the Code to an ``employee'' has frequently been
interpreted in regulations as a reference to a current or a former
employee.\9\ Given the ambiguity in the meaning of ``employee'' and the
legislative intent in this context to include a former employee, as
evidenced by the legislative history and the Blue Book explanation of
the term covered employee, the proposed regulations define employee to
include a former employee.
---------------------------------------------------------------------------
\9\ For example, under Sec. 1.105-11(c)(3)(iii), the
nondiscrimination rules of section 105(h)(3) apply to former
employees even though the Code uses only the term ``employees.''
---------------------------------------------------------------------------
E. Predecessor Corporation
Section 162(m)(3)(C) provides that the term ``covered employee''
means any employee who was a covered employee of the taxpayer for any
preceding taxable year beginning after December 31, 2016. The term
``covered employee'' also means any employee who was a covered employee
of any predecessor of the taxpayer for any preceding taxable year
beginning after December 31, 2016. For clarity, these proposed
regulations use the term ``predecessor of a publicly held corporation''
instead of ``predecessor.'' An individual who is a covered employee for
one taxable year (including a taxable year of a predecessor of a
publicly held corporation) remains a covered employee for subsequent
taxable years.
In certain circumstances, the term ``predecessor of a publicly held
corporation'' includes the publicly held corporation itself if it was a
publicly held corporation for a prior taxable year. Specifically, the
proposed regulations provide that a predecessor of a publicly held
corporation includes a publicly held corporation that, after becoming
privately held, again becomes a publicly held corporation for a taxable
year ending before the 36-month anniversary of the due date for the
corporation's U.S. Federal income tax return (excluding any extensions)
for the last taxable year for which the corporation was previously
publicly held. For a discussion of the proposed special applicability
date related to the definition of predecessor of a publicly held
corporation as applied to a privately held corporation that was
previously a publicly held corporation and again becomes a publicly
held corporation, see section VIII.B of this preamble.
The proposed regulations also provide that the term ``predecessor
of a publicly held corporation'' includes a publicly held corporation
that is acquired (target corporation), or the assets of which are
acquired, by another publicly held corporation (acquiror corporation)
in certain transactions. Accordingly, the covered employees of the
target corporation in those transactions are also covered employees of
the acquiror corporation.
The proposed regulations define the term ``predecessor of a
publicly held corporation'' by reference to the type of corporate
acquisition in which a publicly held corporation is acquired. The
proposed regulations describe corporate acquisitions in four
categories: (1) Corporate reorganizations, (2) corporate divisions, (3)
stock acquisitions, and (4) asset acquisitions. Certain transactions
may fall within more than one category, but this redundancy is intended
to provide certainty as to the application of these rules if a taxpayer
is unsure which category covers the acquisition in question.
With respect to corporate reorganizations, the proposed regulations
provide that a predecessor of a publicly held corporation includes a
publicly held corporation that is acquired or that is the transferor
corporation in a corporate reorganization described in section
368(a)(1). For example, if a publicly held target corporation merges
into a publicly held acquiror corporation, then any covered employee of
the target corporation would become a covered employee of the acquiror
corporation.
With respect to corporate divisions, the proposed regulations
provide that a predecessor of a publicly held corporation includes a
publicly held distributing corporation that distributes or exchanges
the stock of one or more
[[Page 70362]]
controlled corporations in a transaction described in section 355(a)(1)
(a 355(a)(1) transaction) if the controlled corporation is a publicly
held corporation. This rule applies to the distributing corporation
only with respect to covered employees of the distributing corporation
who are hired by the controlled corporation (or by a corporation
affiliated with the controlled corporation that received stock of the
controlled corporation as a shareholder of the distributing corporation
in the 355(a)(1) transaction) within the period beginning 12 months
before and ending 12 months after the distribution. For example, if a
publicly held distributing corporation exchanges with its shareholders
the stock of a controlled corporation for stock of the distributing
corporation in a 355(a)(1) transaction, and the controlled corporation
is a publicly held corporation after the exchange, then any covered
employee of the distributing corporation would become a covered
employee of the controlled corporation if hired by the controlled
corporation within the period beginning 12 months before and ending 12
months after the exchange. Furthermore, a covered employee of the
distributing corporation who becomes a covered employee of the
controlled corporation will remain a covered employee of the
distributing corporation for all subsequent taxable years because, as
discussed in section III.D of this preamble, if an individual is a
covered employee for a taxable year, the individual remains a covered
employee for all subsequent taxable years.
With respect to stock acquisitions, a predecessor of a publicly
held corporation includes a publicly held corporation that becomes a
member of an affiliated group (as defined in proposed Sec. 1.162-
33(c)(1)(ii)). For example, if an affiliated group that is considered a
publicly held corporation pursuant to proposed Sec. 1.162-33(c)(1)(ii)
in the proposed regulations acquires a publicly held target corporation
that becomes a member of the affiliated group, then the target
corporation would be considered a predecessor of the affiliated group.
Therefore, any covered employee of the target corporation would become
a covered employee of the affiliated group.
With respect to asset acquisitions, if an acquiror corporation or
one or more members of an affiliated group (acquiror group) acquires at
least 80% of the operating assets (determined by fair market value on
the date of acquisition) of a publicly held target corporation, then
the target corporation is a predecessor of the acquiror corporation or
group. For example, if an acquiror corporation acquires 80% or more of
the operating assets of a publicly held target corporation, then any
covered employees of the target corporation that become employees of
the acquiror corporation would become covered employees of the acquiror
corporation. For acquisitions of assets that occur over time, the
proposed regulations provide that generally only acquisitions that
occur within a 12-month period are taken into account to determine
whether at least 80% of the target corporation's operating assets were
acquired.
Similarly, this asset acquisition rule provides that the target is
a predecessor of a publicly held corporation only with respect to a
covered employee of the target corporation who is hired by the acquiror
(or a corporation affiliated with the acquiror) within the period
beginning 12 months before and ending 12 months after the date on which
all events necessary for the acquisition have occurred.
These proposed regulations provide that the rules for determining
predecessors are applied cumulatively, with the result that a
predecessor of a corporation includes each predecessor of the
corporation and the predecessor or predecessors of any prior
predecessor or predecessors.
Also, in a similar manner to the rule for a publicly held
corporation that becomes privately held, and subsequently becomes
publicly held, these proposed regulations provide that a target
corporation may be a predecessor corporation in certain circumstances.
For example, the proposed regulations provide that if a target
corporation was a publicly held corporation, subsequently becomes
privately held, is then acquired by an acquiror that is not a publicly
held corporation, and the acquiror becomes a publicly held corporation
for a taxable year ending before the 36-month anniversary of the due
date for the target corporation's U.S. Federal income tax return
(excluding any extensions) for the last taxable year for which the
target corporation was publicly held, then the target corporation is a
predecessor of the publicly held corporation. The proposed regulations
also provide a similar rule for asset acquisitions.
These proposed regulations further clarify that, in the case of an
election to treat as an asset purchase either the sale, exchange, or
distribution of stock pursuant to regulations under section 336(e) or
the purchase of stock pursuant to regulations under section 338, the
corporation is treated as the same corporation before and after the
transaction for which the election is made. Similar exceptions are made
to the general treatment of an election under section 336(e) and
section 338 that would treat the post-election corporation as a new
corporation for purposes of other rules regarding various compensation
tax provisions (see Sec. 1.338-1(b)(2)(i)). These exceptions align
with the other predecessor rules in these proposed regulations by
treating a substantial continuation of the earlier business in the
post-election corporation as continuing the pre-election corporation,
so that the covered employees continue to be covered employees.
F. Disregarded Entities
Under section 162(m)(3), only employees of the taxpayer may be
covered employees. When a corporation owns an entity that is
disregarded as an entity separate from its owner under Sec. 301.7701-
2(c)(2)(i), the corporation that is a publicly held corporation (and
not its wholly-owned entity) is the taxpayer for purposes of section
162(m)(3). In that case, the covered employees of the publicly held
corporation are identified pursuant to the rules discussed in sections
III.A through III.E of this preamble. Accordingly, a PEO, PFO, or
executive officer of a disregarded entity wholly-owned by a corporation
is generally not treated as a PEO, PFO, or executive officer of the
corporate owner (the publicly held corporation). However, consistent
with the definition of the term executive officer in 17 CFR 240.3b-7
that treats executive officers of subsidiaries as executive officers of
the registrant if the executive officers perform policy making
functions for the registrant, an executive officer of a disregarded
entity is treated as an executive officer of its corporate owner for
the taxable year if the executive officer performs policy making
functions for the corporate owner during the taxable year. These
proposed regulations include examples illustrating how to determine
whether employees of a disregarded entity are treated as covered
employees of its publicly held corporate owner for purposes of section
162(m).
The Treasury Department and the IRS are aware that, in an attempt
to circumvent the proposed rules treating a corporation that wholly-
owns a disregarded entity that issues certain securities as a publicly
held corporation for purposes of section 162(m), a corporation could
form a partnership with a minority partner and the partnership could
then employ an individual who otherwise would have
[[Page 70363]]
been a covered employee of the corporation. In these circumstances,
Sec. 1.701-2 and other federal income tax principles may apply to a
transaction in which a corporation forms a partnership in an attempt to
circumvent the proposed rules.
G. Qualified Subchapter S Subsidiaries
Like the case when a corporation owns a disregarded entity, when an
S corporation that is a publicly held corporation owns a QSub, the S
corporation, and not its QSub, is the taxpayer for purposes of section
162(m)(3). Therefore, pursuant to the rules discussed in sections III.A
through III.E of this preamble, a PEO, PFO, or executive officer of
such QSub generally is not treated as a PEO, PFO, or executive officer
of the S corporation owner (that is, the publicly held corporation).
Under these proposed regulations, an executive officer of a QSub is
treated as an executive officer of its S corporation owner for the
taxable year if the executive officer performs policy making functions
for the S corporation owner during the taxable year. See Proposed Sec.
1.162-33(c)(2)(iv). This treatment is consistent with the definition of
the term executive officer in 17 CFR 240.3b-7, which treats executive
officers of subsidiaries as executive officers of the registrant if the
executive officers perform policy making functions for the registrant.
IV. Applicable Employee Remuneration
A. In General
Section 162(m)(4) defines the term ``applicable employee
remuneration'' with respect to any covered employee for any taxable
year as the aggregate amount allowable as a deduction for such taxable
year (determined without regard to section 162(m)) for remuneration for
services performed by such employee (whether or not during the taxable
year). Before TCJA, applicable employee remuneration did not include
remuneration payable on a commission basis (as defined in section
162(m)(4)(B)) or performance-based compensation (as defined in section
162(m)(4)(C)). Section 13601(a) of TCJA amended the definition of
applicable employee remuneration to eliminate these exclusions, while
section 13601(d) of TCJA added a special rule for remuneration paid to
beneficiaries. This special rule, set forth in section 162(m)(4)(F),
provides that remuneration shall not fail to be applicable employee
remuneration merely because it is includible in the income of, or paid
to, a person other than the covered employee, including after the death
of the covered employee.
For simplicity, when incorporating the amendments TCJA made to the
definition of applicable employee remuneration, these proposed
regulations use the term ``compensation'' instead of ``applicable
employee remuneration.'' Consistent with the amendments made by TCJA,
these proposed regulations provide that compensation means the
aggregate amount allowable as a deduction under chapter 1 of the Code
for the taxable year (determined without regard to section 162(m)) for
remuneration for services performed by a covered employee, whether or
not the services were performed during the taxable year. The proposed
regulations also clarify that compensation includes an amount that is
includible in the income of, or paid to, a person other than the
covered employee, including after the death of the covered employee.
B. Compensation Paid by a Partnership to a Covered Employee
These proposed regulations address the issue of compensation paid
by a partnership (as defined for Federal tax purposes) to a covered
employee of a publicly held corporation; this issue has been subject to
a no-rule position for private letter rulings since 2010. Between 2006
and 2008, the IRS issued four private letter rulings addressing
specific situations in which a publicly held corporation was a partner
in a partnership. As part of the analysis, the private letter rulings
stated that if a publicly held corporation is a partner in a
partnership, then section 162(m) does not apply to the corporation's
distributive share of the partnership's deduction for compensation paid
by the partnership for services performed for it by a covered employee
of the corporation. Therefore, the private letter rulings ruled on the
facts presented that section 162(m) did not limit the otherwise
deductible compensation expense of the publicly held corporation for
compensation the partnership paid the covered employee. Upon further
consideration, and recognizing the potential for abuse, the IRS stopped
issuing private letter rulings involving section 162(m) and
partnerships.\10\ Stakeholders have asked the Treasury Department and
the IRS to address this issue in these proposed regulations.
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\10\ Initially, the IRS announced the no-rule position in 2010
in section 5.06 of Revenue Procedure 2010-3, 2010-1 I.R.B. 110,
which provided that ``[w]hether the deduction limit under Sec.
162(m) applies to compensation attributable to services performed
for a related partnership'' was an area under study in which rulings
or determination letters will not be issued until the IRS resolves
the issue through publication of a revenue ruling, revenue
procedure, regulations, or otherwise. Most recently, section
4.01(13) of Revenue Procedure 2019-3, 2019-01 I.R.B. 130, provides
that this issue is an area in which rulings or determination letters
will not ordinarily be issued.
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In relevant part, section 162(m)(1) provides that ``[i]n the case
of any publicly held corporation, no deduction shall be allowed under
this chapter for applicable employee remuneration with respect to any
covered employee.'' This language does not limit the application of
section 162(m) to deductions for compensation paid by the publicly held
corporation; it also covers the deduction for compensation paid to the
corporation's covered employees by another party to the extent the
corporation is allocated a share of the otherwise deductible item. For
instance, if a publicly held corporate partner is allocated a
distributive share of the partnership's deduction for compensation paid
by the partnership, the allocated distributive share of the deduction
is subject to section 162(m) even though the corporation did not
directly pay the compensation to the covered employee. Thus, the
publicly held corporation must take into account its distributive share
of the partnership's deduction for compensation expense paid to the
publicly held corporation's covered employee and aggregate that
distributive share and the corporation's otherwise allowable deduction
for compensation paid directly to that employee in determining the
amount allowable to the corporation as a deduction for compensation
under section 162(m). See Sec. 1.702-1(a)(8)(ii) and (iii).
The Treasury Department and the IRS are aware that this issue has
not been addressed in generally applicable guidance and understand
taxpayers may have taken positions contrary to those set forth in these
proposed regulations. Accordingly, the proposed regulations provide
transition relief for current compensation arrangements, but also
prohibit the formation or expansion of these types of structures for
the purpose of avoiding the application of section 162(m) prior to the
issuance of final regulations. Specifically, in order to ensure that
compensation agreements are not formed or otherwise structured to
circumvent this rule after publication of these proposed regulations
and prior to the publication of the final regulations, the proposed
regulations propose that the rule with respect to compensation paid by
a partnership will apply to any deduction for compensation that is
otherwise
[[Page 70364]]
allowable for a taxable year ending on or after December 20, 2019 but
will not apply to compensation paid pursuant to a written binding
contract in effect on December 20, 2019 that is not materially modified
after that date. The Treasury Department and the IRS request comments
on whether similar rules should apply to trusts.
C. Compensation for Services in a Capacity Other Than an Executive
Officer
A commenter suggested that, if a covered employee separates from
service as an executive officer and subsequently performs services as a
director of the publicly held corporation, then the compensation paid
to the individual as a director should not be considered applicable
employee remuneration for purposes of section 162(m)(4). These proposed
regulations do not adopt this suggestion.
Since the enactment of section 162(m) in 1993, director fees were
considered applicable employee remuneration for purposes of section
162(m)(4). In describing compensation for which the deduction is
limited by section 162(m), the legislative history to the enactment of
section 162(m) states:
Unless specifically excluded, the deduction limitation applies
to all remuneration for services, including cash and the cash value
of all remuneration (including benefits) paid in a medium other than
cash. If an individual is a covered employee for a taxable year, the
deduction limitation applies to all compensation not explicitly
excluded from the deduction limitation, regardless of whether the
compensation is for services as a covered employee and regardless of
when the compensation was earned.
House Conf. Rpt. 103-213, 585 (1993). Thus, in enacting section 162(m),
Congress did not exclude compensation for services not performed as a
covered employee from the deduction limitation. As stated in the
preamble to the 1993 proposed regulations, ``[t]he deduction limit of
section 162(m) applies to any compensation that could otherwise be
deducted in a taxable year, except for enumerated types of payments set
forth in section 162(m)(4)'' (58 FR 66310, 66310). Compensation earned
by a covered employee through a non-employee position, such as director
fees, was never one of the ``enumerated types of payments set forth in
section 162(m)(4)'' and so this compensation does not fall within the
exception and has always been considered applicable employee
remuneration for which the deduction is limited by section 162(m).\11\
The amendments to section 162(m)(4) made by TCJA did not change this
aspect of the definition of applicable employee remuneration;
accordingly, the proposed regulations do not adopt the commenter's
suggestion.
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\11\ Furthermore, as explained in section II.E of this preamble,
the final regulations provide that all compensation paid to a
covered employee by more than one member of an affiliated group is
aggregated for purposes of prorating the amount disallowed as a
deduction by section 162(m). For purposes of aggregating the total
compensation paid by the affiliated group, the final regulations do
not exclude compensation paid for services performed by a covered
employee in a capacity other than an employee (for example, as an
independent contractor).
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Pursuant to the amended definition of covered employee in section
162(m)(3)(C), a covered employee includes any individual who was a
covered employee of the publicly held corporation (or any predecessor)
for any taxable year beginning after December 31, 2016. Therefore, a
covered employee remains a covered employee after separation from
service. If, after separation from service as an employee, a covered
employee returns to provide services to the publicly held corporation
in any capacity, including as a common law employee, a director, or an
independent contractor, then any deduction for compensation paid to the
covered employee is subject to section 162(m).
V. Privately Held Corporations That Become Publicly Held
Section 162(m) applies to the deduction for compensation paid to a
covered employee that is otherwise deductible for a taxable year of a
publicly held corporation. These proposed regulations provide that, in
the case of a corporation that is a privately held corporation that
becomes a publicly held corporation, section 162(m) applies to the
deduction for any compensation that is otherwise deductible for the
taxable year ending on or after the date that the corporation becomes a
publicly held corporation. Furthermore, the proposed regulations
provide that a corporation is considered to become publicly held on the
date that its registration statement becomes effective either under the
Securities Act or the Exchange Act.
Commenters suggested that these proposed regulations retain the
transition relief provided in the final regulations for privately held
corporations that become publicly held. Commenters reasoned that
corporations that become publicly held corporations need time to adjust
compensation arrangements to take into account section 162(m). The
proposed regulations do not adopt this suggestion.
As background, in enacting section 162(m) in 1993, Congress
excepted performance-based compensation from the definition of
applicable employee remuneration and, thus, the section 162(m)
deduction limitation. Before TCJA, section 162(m)(4)(C) defined
performance-based compensation as ``any remuneration payable solely on
account of the attainment of one or more performance goals, but only
if--
(i) the performance goals are determined by a compensation
committee of the board of directors of the taxpayer which is comprised
solely of 2 or more outside directors,
(ii) the material terms under which the remuneration is to be paid,
including the performance goals, are disclosed to shareholders and
approved by a majority of the vote in a separate shareholder vote
before the payment of such compensation, and
(iii) before any payment of such remuneration, the compensation
committee referred to in clause (i) certifies that the performance
goals and any other material terms were in fact satisfied.
These requirements are also set forth in Sec. Sec. 1.162-27(e)(2)
through (e)(5). In enacting section 162(m), Congress recognized that
privately held corporations may have difficulty adopting compensation
arrangements that satisfy the requirements for performance-based
compensation. Specifically, Congress was concerned about the
shareholder approval requirement. Congress also recognized that, when a
corporation becomes a publicly held corporation in connection with an
initial public offering (IPO), prospective shareholders who read the
corporation's prospectus are aware of the compensation arrangements
adopted prior to the IPO. Accordingly, Congress thought that
shareholders who read the prospectus and purchase the corporation's
shares are, in effect, approving the corporation's compensation
arrangements. The 1993 legislative history provides as follows:
[I]n the case of a privately held company that becomes publicly
held, the prospectus is subject to the rules similar to those
applicable to publicly held companies. Thus, if there has been
disclosure that would satisfy the rules described above, persons who
buy stock in the publicly held company will be aware of existing
compensation arrangements. No further shareholder approval is
required of compensation arrangements existing prior to the time the
company became public unless there is a material modification of
such arrangements.
[[Page 70365]]
House Conf. Rpt. 103-213, 588 (1993). Based on the legislative history,
the final regulations provided transition relief for corporations that
become publicly held. Section 1.162-27(f)(1) provides that in the case
of a corporation that was not a publicly held corporation and then
becomes a publicly held corporation, section 162(m) ``does not apply to
any remuneration paid pursuant to a compensation plan or agreement that
existed during the period in which the corporation was not publicly
held.'' If a corporation becomes publicly held in connection with an
IPO, then the relief provided in Sec. 1.162-27(f)(1) applies only to
the extent that the prospectus accompanying the IPO disclosed
information concerning the existing compensation plans or agreements
and satisfied all applicable securities laws.
Section 13601(a) of TCJA amended the definition of applicable
employee remuneration in section 162(m)(4) to eliminate the exception
for performance-based compensation, which among other things, made
shareholder approval of compensation arrangements irrelevant with
respect to entitlement to the deduction. Accordingly, these proposed
regulations do not retain the transition relief provided in the final
regulations.
For a discussion of rules applicable to privately held corporations
that previously were publicly held corporations, see section III.E. of
this preamble.
VI. Grandfather Rules
A. In General
Section 13601(e) of TCJA generally provides that TCJA amendments to
section 162(m) apply to taxable years beginning after December 31,
2017. However, it further provides that those amendments do not apply
to remuneration that is provided pursuant to a written binding contract
that was in effect on November 2, 2017, and that was not modified in
any material respect on or after such date.
As discussed in Notice 2018-68, the text of section 13601(e) of the
TJCA is almost identical to the text of pre-TCJA section 162(m)(4)(D),
which provided a grandfather rule in connection with the enactment of
section 162(m) in 1993. Under that grandfather rule, section 162(m) did
not apply to remuneration payable under a written binding contract that
was in effect on February 17, 1993, and that was not modified
thereafter in any material respect before such remuneration was paid.
Section 1.162-27(h) provides guidance on the definitions of written
binding contract and material modification for purposes of applying the
original grandfather rule, and Notice 2018-68 adopted those definitions
for purposes of the grandfather rule in connection with section
13601(e) of TCJA. The proposed regulations likewise adopt those
definitions. Notice 2018-68 also provided examples illustrating the use
of these definitions, and many of those examples are incorporated in
these proposed regulations. However, to increase clarity, the proposed
regulations replace some examples from Notice 2018-68 with other
examples. This replacement with new examples does not reflect a
substantive change from the definitions of written binding contract and
material modification provided in Notice 2018-68.
Notice 2018-68 clarified that remuneration is payable under a
written binding contract that was in effect on November 2, 2017, only
to the extent that the corporation is obligated under applicable law
(for example, state contract law) to pay the remuneration under the
contract if the employee performs services or satisfies the applicable
vesting conditions. Accordingly, the TJCA amendments to section 162(m)
apply to any amount of remuneration that exceeds the amount of
remuneration that applicable law obligates the corporation to pay under
a written binding contract that was in effect on November 2, 2017, if
the employee performs services or satisfies the applicable vesting
conditions.
As an alternative to the grandfather rules in Notice 2018-68, some
commenters suggested that these proposed regulations adopt a safe
harbor regarding the determination of whether a contract qualifies as a
written binding contract so that compensation paid pursuant to the
contract would be grandfathered. Under the suggested safe harbor, any
arrangement in effect on or before November 2, 2017, would be treated
as a written binding contract if an amount related to the compensation
payable under the contract was accrued (or could have been accrued) as
a cost under Generally Accepted Accounting Principles (GAAP),
regardless of whether the corporation is obligated to pay the
remuneration under applicable law.
Although the Treasury Department and the IRS understand that the
application of the written binding contract standard may be burdensome
in certain cases and welcome the potential for simplification, the
suggested safe harbor raises several issues. First, as expressed in the
comment, the accrual of a cost is often based on predictions of whether
the amount will be paid, which may not necessarily reflect whether the
amount must be paid in all cases. This raises issues of whether costs
identified correlate with the statutory standard of being paid under a
legally binding contract if, in fact, the employer was not necessarily
bound to pay the amounts of compensation but rather was likely to pay
them. Second, the suggested safe harbor is an accounting standard based
on financial statements audited by accountants. This raises issues of
tax administration, including the potential for the IRS to audit for
section 162(m) purposes a corporation's ``audited'' financial
statements, and challenges IRS examiners would have in applying GAAP
principles. For these reasons, the proposed regulations do not adopt
this suggested safe harbor. However, the Treasury Department and the
IRS welcome further comments on whether the suggested safe harbor
standard would be administrable, including how it would be implemented
with respect to differing positions on corporate tax returns (such as
use of the standard in Notice 2018-68 and these proposed regulations)
that have already been filed.
B. Compensation Subject to Discretion
Under the definition of written binding contract in Notice 2018-68
and these proposed regulations, applicable law (such as state contract
law) determines the amount of compensation that a corporation is
obligated to pay pursuant to a written binding contract in effect on
November 2, 2017. Some commenters suggested that negative discretion be
completely disregarded in determining the amount of compensation that a
corporation is obligated to pay pursuant to a written binding contract.
The proposed regulations do not adopt this approach, because it is
contrary to the statutory text and the legislative history. See House
Conf. Rpt. 115-466, 490 (2017). The Treasury Department and the IRS are
aware, however, that compensation arrangements may purport to provide
the corporation with a wider scope of negative discretion than
applicable law permits the corporation to exercise. In that case, the
negative discretion is taken into account only to the extent the
corporation may exercise the negative discretion under applicable law.
One commenter asked whether an amount of compensation is
grandfathered if it is paid pursuant to a written binding contract
under which the corporation is obligated to recover an amount of
compensation from the employee if a vesting condition is later
determined not to have been satisfied.
[[Page 70366]]
For example, a vesting condition may be based on the achievement of
results reported in the financial statements. In this example, if a
corporation pays a bonus based on the financial statements but the
financial statements are subsequently restated and demonstrate that the
vesting condition was not, in fact, satisfied, then the corporation is
required to recover a portion of the bonus from the employee. If, under
applicable law, the employee retains the remaining portion of the bonus
then, pursuant to the grandfather rules in Notice 2018-68 and these
proposed regulations, that remaining portion of the bonus is
grandfathered compensation that is not subject to TCJA amendments.
Similarly, if the corporation has discretion to recover compensation
(in whole or in part), only the amount of compensation that the
corporation is obligated to pay under applicable law that is not
subject to potential recovery is grandfathered. The proposed
regulations include examples illustrating these principles.
Applicable law may provide a corporation with contingent discretion
to recover compensation. This issue was not addressed in Notice 2018-
68. Under these proposed regulations, a corporation is not treated as
currently having discretion merely because it will have discretion to
recover an amount if a condition occurs subsequent to the vesting and
payment of the compensation and the occurrence of the condition is
objectively outside of the corporation's control. For example, pursuant
to a written binding contract in effect on November 2, 2017, a
corporation may be obligated under applicable law to pay $500,000 of
compensation if the employee satisfies a vesting condition, but the
corporation may be permitted to recover $300,000 from the employee if
the employee is convicted of a felony within three calendar years from
the date of payment. If the employee is not convicted of a felony
within three calendar years from the date of payment, then the $500,000
is grandfathered. If, however, the employee is convicted of a felony
within three years after the payment of the $500,000, then the
corporation has discretion whether to recover the $300,000 from the
employee. Accordingly, if the employee is convicted of a felony within
three calendar years after the payment, $300,000 of the $500,000 is not
grandfathered. This is true regardless of whether the corporation
exercises its discretion to recover the $300,000. Because the
corporation may not recover $200,000 of the $500,000 payment in any
event, the $200,000 remains grandfathered regardless of whether the
employee is convicted of a felony.
C. Account and Nonaccount Balance Plans
Notice 2018-68 includes examples illustrating the application of
the grandfather rule to account balance plans, and those examples are
incorporated into these proposed regulations. Commenters requested
guidance on the application of the grandfather rule to nonaccount
balance plans, and some of these commenters suggested that benefits
accruing under a nonaccount balance plan after November 2, 2017, should
be automatically grandfathered. The proposed regulations do not adopt
this approach. Consistent with the text of section 13601(e) of TCJA
providing the grandfather rule, the amount of compensation that is
grandfathered under a nonaccount balance plan is the amount that the
corporation is obligated to pay under applicable law on November 2,
2017. The proposed regulations include examples illustrating these
rules.
Commenters also requested guidance on determining the amount of
compensation that a corporation is obligated to pay under applicable
law with respect to linked plan arrangements. In these arrangements,
the amount payable to an employee under a NQDC plan is linked to a
qualified employer plan. For example, a typical arrangement may provide
that the amount of NQDC to be paid to an employee is the account
balance (or an accumulated benefit) in a NQDC plan reduced by the
account balance in a section 401(k) plan. These proposed regulations
include an example involving this type of arrangement.
D. Earnings on Grandfathered Amounts in Account and Nonaccount Balance
Plans
Notice 2018-68 includes an example illustrating the circumstances
in which earnings credited to account balance plans after November 2,
2017, are grandfathered, as well as an example illustrating that those
earnings are not grandfathered when the corporation retains the right
under applicable law to amend the plan at any time either to stop or to
reduce future credits (including earnings) to the account balance.
Commenters suggested that earnings credited after November 2, 2017, on
grandfathered amounts in nonaccount balance plans should also be
grandfathered. The proposed regulations do not adopt the commenters'
suggestion. Instead, consistent with TCJA and the guidance in Notice
2018-68, the proposed regulations provide that earnings credited after
November 2, 2017, on grandfathered amounts are grandfathered only if
the corporation is obligated to pay the earnings under applicable law
pursuant to a written binding contract in effect on November 2, 2017.
Stakeholders asked how Sec. 1.409A-3(j)(4)(ix)(C)(3) affects the
determination of whether earnings credited on a grandfathered amount
after November 2, 2017, are grandfathered if the corporation retains
the right under applicable law to terminate the plan at any time in
compliance with section 409A. Section 1.409A-3(j)(4)(ix)(C)(3) provides
that, if a service recipient terminates a NQDC plan, then the time and
form of payments may be accelerated, but payment may not be made within
12 months of the date of termination of the plan. The definition of
written binding contract in Notice 2018-68 and these proposed
regulations provides that earnings credited after November 2, 2017, on
grandfathered amounts are grandfathered only if the corporation is
obligated to pay the earnings under applicable law pursuant to a
written binding contract in effect on November 2, 2017. Accordingly,
if, under applicable law, the corporation is obligated to continue to
credit earnings for amounts under the NQDC plan during the 12 months
after terminating the plan, then the earnings would be
grandfathered.\12\ In that case, the grandfathered amount would be the
amount that the corporation is obligated to pay under applicable law as
of November 2, 2017, plus the 12 months of earnings that the
corporation is obligated to credit under applicable law. However, any
additional amounts that become payable under the plan after November 2,
2017, and earnings on those amounts would not be grandfathered.
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\12\ Section 1.409A-3(j)(4)(ix)(C) provides that if a service
recipient terminates a NQDC plan (as defined in Sec. 1.409A-1(c))
for one participant, then it must terminate the NQDC plan for all
participants. Given this requirement, a corporation might refrain
from terminating a NQDC plan and continue to credit earnings on a
grandfathered amount after November 2, 2017. If a corporation is
permitted under applicable law to terminate the NQDC plan, then only
the amount it would be obligated to pay under applicable law if it
did terminate the NQDC plan is grandfathered.
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Applicable law and the terms of the plan determine the amount of
earnings that the corporation is obligated to credit for amounts under
the plan during the 12 months after plan
[[Page 70367]]
termination. Thus, for example, with respect to a nonaccount balance
plan, under applicable law, the amount of earnings that the corporation
is obligated to credit might be limited to the difference between the
present value of the benefit under the plan as of November 2, 2017, and
any increase in present value due solely to passage of time (12
months). Furthermore, with respect to a nonaccount balance plan that
provides for a formula amount (for example, the amount payable under
the plan is based on the participant's final salary and years of
service), the amount of earnings that the corporation is obligated to
credit under applicable law might be limited to a reasonable rate of
interest to reflect the time value of money during the passage of time
(12 months) applied to the benefit under the plan as of November 2,
2017 (and not reflecting any additional salary increase or years of
service accumulated after November 2, 2017).
E. Severance Agreements
Commenters asked about the application of the grandfather rule in
Notice 2018-68 to compensation payable pursuant to a severance
agreement that is a written binding contract and is in effect on
November 2, 2017. Severance payable under such a contract is
grandfathered only if the amount of severance is based on compensation
elements the employer is obligated to pay under the contract. For
example, if the amount of severance is based on final base salary, the
severance is grandfathered only if the corporation is obligated to pay
both the base salary and the severance under applicable law pursuant to
a written binding contract in effect on November 2, 2017. For this
purpose, a corporation may be obligated to pay severance under a
written binding contract as of November 2, 2017, even if the employee
remains employed as of November 2, 2017, but only with respect to the
amount the corporation would have been required to pay if the employee
had been terminated as of November 2, 2017.
Commenters also asked whether all or a portion of severance is
grandfathered if a portion of the amount is based on a variable
component, such as a discretionary or performance bonus. The examples
in these proposed regulations illustrate that each component of the
severance formula is analyzed separately to determine the amount of
severance that is grandfathered. For example, the amount of severance
may be equal to two times the sum of: (1) Final base salary and (2) any
bonus paid within 12 months prior to separation from service. In this
example, the amount of severance is based on two components, base
salary and bonus. Therefore, the entire amount of severance (based on
both components) is grandfathered only if, under applicable law, the
corporation is obligated to pay both portions, the base salary and the
bonus pursuant to a written binding contract in effect on November 2,
2017.
F. Material Modification
1. In General
These proposed regulations adopt the definition of material
modification in Notice 2018-68. Under that definition, a material
modification occurs when the contract is amended to increase the amount
of compensation payable to the employee. Furthermore, if a written
binding contract is materially modified, it is treated as a new
contract entered into as of the date of the material modification.
Accordingly, amounts received by an employee under the contract before
a material modification are not affected, but amounts received
subsequent to the material modification are treated as paid pursuant to
a new contract, rather than as paid pursuant to a written binding
contract in effect on November 2, 2017. The adoption of a supplemental
contract or agreement that provides for increased compensation, or the
payment of additional compensation, is a material modification of a
written binding contract if the facts and circumstances demonstrate
that the additional compensation is paid on the basis of substantially
the same elements or conditions as the compensation that is otherwise
paid pursuant to the written binding contract in effect on November 2,
2017. However, a material modification of a written binding contract
does not include a supplemental payment that is equal to or less than a
reasonable cost-of-living increase over the payment made in the
preceding year under that written binding contract. In that case, only
the deduction for the reasonable cost-of-living increase is subject to
section 162(m) as amended by TCJA. In addition, the failure, in whole
or in part, to exercise negative discretion under a contract does not
result in the material modification of that contract. Finally, if
amounts are paid to an employee from more than one written binding
contract (or if a single written document consists of several written
binding contracts), then a material modification of one written binding
contract does not automatically result in a material modification of
the other contracts unless the material modification affects the
amounts payable under those contracts.
2. Earnings on Grandfathered Amounts That are Subsequently Deferred
Notice 2018-68 provides rules for determining whether a material
modification occurs if a written binding contract in effect on November
2, 2017, is subsequently modified to defer the payment of compensation.
Under those rules, which are adopted in these proposed regulations, if
the contract is modified to defer the payment of compensation, any
compensation paid or to be paid that is in excess of the amount that
was originally payable to the employee under the contract will not be
treated as resulting in a material modification if the additional
amount is based on either a reasonable rate of interest or a
predetermined actual investment (whether or not assets associated with
the amount originally owed are actually invested therein) such that the
amount payable by the employer at the later date will be based on the
actual rate of return on the predetermined actual investment (including
any decrease, as well as any increase, in the value of the investment).
The proposed regulations provide that a predetermined actual investment
means a predetermined actual investment as defined in Sec.
31.3121(v)(2)-1(d)(2)(i)(B), and also include examples illustrating
these rules relating to the treatment of earnings.
However, even though the payment of earnings will not result in the
contract being materially modified, this generally does not mean that
the earnings are treated as grandfathered. For situations in which an
employee defers an amount of grandfathered compensation after November
2, 2017, the earnings on the deferred amount are not grandfathered if,
as of November 2, 2017, the corporation was not obligated under the
terms of the contract to provide the deferral election and to pay the
earnings on the deferred amount under applicable law. Pursuant to the
definition of written binding contract in Notice 2018-68 and these
proposed regulations, these earnings are not grandfathered because, as
of November 2, 2017, the corporation was not obligated to pay them
under applicable law.
3. Material Modification Prior to Payment of a Grandfathered Amount
Commenters asked whether a grandfathered amount of compensation is
no longer considered grandfathered if the underlying compensation
arrangement is materially modified after November 2, 2017, but before
the
[[Page 70368]]
payment of the grandfathered amount. Pursuant to the definition of
material modification in Notice 2018-68 and these proposed regulations,
if the contract is materially modified after November 2, 2017, but
before the payment of a grandfathered amount of compensation, then the
compensation is treated as paid pursuant to the new contract and is no
longer grandfathered. For example, if, under applicable law, a
corporation is obligated to pay $100,000 on December 31, 2020, under a
written binding contract in effect on November 2, 2017, then the
$100,000 is grandfathered. If, on January 1, 2019, the contract is
materially modified, then the $100,000 is treated as paid pursuant to a
new contract and is not grandfathered.
4. Acceleration of Payment or Vesting
Under the definition of material modification in Notice 2018-68 and
these proposed regulations, a modification of a written binding
contract that accelerates the payment of compensation is a material
modification unless the amount of compensation paid is discounted to
reasonably reflect the time value of money. For example, if a
corporation is obligated under applicable law to pay compensation on
December 31, 2020, pursuant to a written binding contract in effect on
November 2, 2017, then the compensation is grandfathered. If the
corporation pays the entire amount of compensation on December 31, 2019
without a discount to reasonably reflect the time of value of money,
then the entire amount of compensation is treated as paid pursuant to a
new contract and is no longer grandfathered. Furthermore, any
subsequent payment made pursuant to the contract is not grandfathered
because the contract itself was materially modified when the prior
payment was accelerated without a discount to reasonably reflect the
time value of money.
Commenters asked whether accelerating the payment of compensation
attributable to equity-based compensation is considered a material
modification when the payment is subject to a substantial risk of
forfeiture. For example, an option may be subject to a substantial risk
of forfeiture if, on the date of grant, the terms of the option provide
that an employee may exercise the option only after performing services
for three years after the date of grant. In this example, if the terms
of the option are subsequently modified to require performance of
services for only two years, then the modification results in the lapse
of a substantial risk of forfeiture. One might consider this a material
modification because the employee may exercise the option and receive
compensation attributable to the exercise earlier than provided in the
terms of the option on the date of grant. However, commenters suggested
that accelerating vesting of equity-based compensation should not be a
material modification because the acceleration does not provide for an
increase in the amount of compensation received. The commenters
reasoned that the acceleration of vesting of an equity award for which
the amount of compensation is always variable is unlike the
acceleration of the payment of a fixed cash award in which the
acceleration may always be considered an increase in compensation due
to the time value of money. To support their recommendation, commenters
pointed out that, with respect to incentive stock options, section
424(h)(3)(C) and Sec. 1.424-1(e)(4)(ii) provide that acceleration of
vesting of an incentive stock option is not a modification.
These proposed regulations adopt the commenters' suggestion.
Specifically, these proposed regulations provide that for compensation
received pursuant to the substantial vesting of restricted property, or
the exercise of a stock option or stock appreciation right that do not
provide for a deferral of compensation (as defined in Sec. 1.409A-
1(b)(5)(i) and (ii)), a modification of a written binding contract in
effect on November 2, 2017, that results in a lapse of the substantial
risk of forfeiture (as defined Sec. 1.83-3(c)) is not considered a
material modification. Likewise, with respect to other compensation
arrangements, if an amount of compensation payable under a written
binding contract in effect on November 2, 2017, is subject to a
substantial risk of forfeiture (as defined in Sec. 1.409A-1(d)), then
a modification of the contract that results in a lapse of the
substantial risk of forfeiture is not considered a material
modification. Thus, for all forms of compensation, a modification to a
written binding contract that accelerates vesting will not be
considered a material modification.
The Treasury Department and the IRS considered alternatives to the
commenters' suggestion. For example, the Treasury Department and the
IRS considered an approach based on the rules under section 280G. Under
those rules, an acceleration of vesting can give rise to an excess
parachute payment under section 280G even if the timing of the payment
is not accelerated. See Sec. 1.280G-1, Q&A-24. In other words, the
rules under section 280G are based on the principle that there is
independent value attributable to the acceleration of vesting, even if
the timing of the payment is unchanged. Given the limited scope of the
section 162(m) grandfathering rule and its diminishing applicability
over time, the Treasury Department and the IRS have determined that it
is not necessary to apply that principle in this context.
G. Ordering Rule for Payments Consisting of Grandfathered and Non-
Grandfathered Amounts
Some NQDC arrangements provide for a series of payments instead of
a lump sum. For a NQDC arrangement that is a written binding contract
entered into prior to November 2, 2017, only a portion of the amounts
payable under the arrangement might be grandfathered depending on the
terms of the arrangement and applicable law. To identify the
grandfathered amount when payment under the arrangement is made in a
series of payments, the proposed regulations provide that the
grandfathered amount is allocated to the first otherwise deductible
payment paid under the arrangement. If the grandfathered amount exceeds
the payment, then the excess is allocated to the next otherwise
deductible payment paid under the arrangement. This process is repeated
until the entire grandfathered amount has been paid. For example,
assume that a NQDC arrangement provides for an annual payment of
$100,000 for three years, and only $120,000 is grandfathered. Pursuant
to the proposed regulations, the entire $100,000 paid in the first year
is grandfathered. In the second year, only $20,000 of the $100,000
payment is grandfathered; the remaining $80,000 paid in the second year
is not grandfathered. In the third year, none of the $100,000 payment
is grandfathered.
VII. Coordination With Section 409A
Section 409A addresses NQDC arrangements and sets forth certain
requirements that must be met to avoid current income inclusion and
certain additional income tax. NQDC arrangements must designate a time
and form of payment, among other requirements, to comply with section
409A. Pursuant to Sec. 1.409A-2(b)(7)(i), a payment may be delayed
past the designated payment date to the extent that the service
recipient reasonably anticipates that, if the payment were made as
scheduled, the service recipient's deduction with respect to such
payment would not be permitted due to the application of section
[[Page 70369]]
162(m).\13\ Generally, a payment delayed in accordance with Sec.
1.409A-2(b)(7)(i) must be paid no later than the service provider's
first taxable year in which the deduction of such payment will not be
barred by the application of section 162(m).
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\13\ In general, if a payment is delayed pursuant to Sec.
1.409A-2(b)(7)(i), then the payment must be made either during the
service provider's first taxable year in which the service recipient
reasonably anticipates, or reasonably should anticipate, that the
payment will not fail to be deductible because of section 162(m), if
the payment is made during such year or, if later, during the period
beginning on the day the service provider separates from service and
ending on the later of the last day of the taxable year of the
service recipient in which the separation from service occurs or the
15th day of the third month following the separation from service.
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If any scheduled payment to a service provider in a service
recipient's taxable year is delayed in accordance with Sec. 1.409A-
2(b)(7)(i), then the delay in payment is treated as a subsequent
deferral election unless all scheduled payments to that service
provider that could be delayed in accordance with Sec. 1.409A-
2(b)(7)(i) are also delayed.\14\ A subsequent deferral election will
violate section 409A if the election fails to satisfy the requirements
of section 409A(a)(4)(C).\15\ A similar rule under Sec. 1.409A-
1(b)(4)(ii) permits delayed payments of compensation that otherwise
qualifies as a short-term deferral under Sec. 1.409A-1(b)(4)(i)
(commonly referred to as the short-term deferral exception).
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\14\ See Sec. 1.409A-2(b)(7) for additional requirements for
the service recipient to delay a payment so that the delay is not
treated as a subsequent deferral election, such as treating all
payments to similarly situated service providers on a reasonably
consistent basis.
\15\ Pursuant to section 409A(a)(4)(C), a subsequent deferral
election (i) must be made at least 12 months before the prior
scheduled payment date, (ii) cannot be effective for at least 12
months after the date of the subsequent election, and (iii) must
delay the payment at least 5 years from the original scheduled
payment date.
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Before TCJA, an individual who was a covered employee for one
taxable year would not necessarily remain a covered employee for
subsequent taxable years, and would not be a covered employee after
separation from service. Accordingly, parties to NQDC arrangements
anticipated that in these cases, pursuant to Sec. Sec. 1.409A-
1(b)(4)(ii) and 1.409A-2(b)(7)(i), the corporation would be able to
make the payment when the individual separated from service (if not
earlier), when the individual would no longer be a covered employee and
the deduction for the payment would no longer be restricted due to the
application of section 162(m). Because TCJA amendments to the
definition of covered employee fundamentally alter the premise of
Sec. Sec. 1.409A-1(b)(4)(ii) and 1.409A-2(b)(7)(i), commenters asked
whether a service recipient may delay the scheduled payment of
grandfathered amounts in accordance with Sec. Sec. 1.409A-1(b)(4)(ii)
and 1.409A-2(b)(7)(i), without delaying the payment of non-
grandfathered amounts, in circumstances in which the service recipient
has discretion to delay the payment. Commenters stated that the service
provider may not want the non-grandfathered payments delayed and that
the corporation would be willing to pay those payments under the
original schedule since a delay in many cases would not result in the
corporation being able to deduct the payment.
The Treasury Department and the IRS have concluded that the rules
should be modified to accommodate this change. Consequently, in
circumstances in which the service recipient has discretion to delay
the payment, a service recipient may delay the scheduled payment of
grandfathered amounts in accordance with Sec. Sec. 1.409A-1(b)(4)(ii)
and 1.409A-2(b)(7)(i), without delaying the payment of non-
grandfathered amounts, and the delay of the grandfathered amounts will
not be treated as a subsequent deferral election. As discussed in
section VI of this preamble, the amendments made to section 162(m) by
TCJA do not apply to grandfathered amounts. Therefore, the deduction
for amounts grandfathered under the amended section 162(m) is not
subject to section 162(m) when paid to a former covered employee who
separated from service. Thus, the payment of these grandfathered
amounts may be delayed consistent with Sec. Sec. 1.409A-1(b)(4)(ii)
and 1.409A-2(b)(7)(i). The Treasury Department and the IRS intend to
incorporate these modifications into the regulations under section
409A, and taxpayers may rely on the guidance in this paragraph of the
preamble for any taxable year beginning after December 31, 2017, until
the issuance of proposed regulations under section 409A incorporating
these modifications and permitting taxpayers to rely on such proposed
regulations under section 409A.
Even though Sec. Sec. 1.409A-1(b)(4)(ii) and 1.409A-2(b)(7)(i)
provide that the service recipient has discretion to delay a payment,
and that the discretion is not required to be set forth in the written
plan, the Treasury Department and the IRS understand that compensation
arrangements in effect on November 2, 2017, may explicitly require the
service recipient to delay a payment if the service recipient
reasonably believes the deduction with respect to the payment will not
be permitted under section 162(m). Commenters pointed out that with
respect to a service provider who is a covered employee, non-
grandfathered amounts may require the passage of a significant period
of time before a payment of the entire amount would be deductible, and
may possibly never become deductible if the service provider dies and
the payment (or remaining amount due) is payable at death. Commenters
requested that relief be provided so that compensation arrangements may
be amended to no longer require the service recipient to delay a
payment that the service recipient reasonably believes will not be
deductible under section 162(m) without resulting in a failure to meet
the requirements of section 409A. The Treasury Department and the IRS
have determined that this type of relief is appropriate given the
impact of TCJA amendments on application of the rules in Sec. Sec.
1.409A-1(b)(4)(ii) and 1.409A-2(b)(7)(i). Accordingly, if a NQDC
arrangement is amended to remove the provision requiring the
corporation to delay a payment if the corporation reasonably
anticipates at the time of the scheduled payment that the deduction
would not be permitted under section 162(m), then the amendment will
not result in an impermissible acceleration of payment under Sec.
1.409A-3(j), and will not be considered a material modification for
purposes of the grandfather rule under the amended section 162(m). The
plan amendment must be made no later than December 31, 2020. If,
pursuant to the amended plan, the corporation would have been required
to make a payment (or payments) prior to December 31, 2020, then the
payment (or payments) must be made no later than December 31, 2020. The
Treasury Department and the IRS intend to incorporate these
modifications into the regulations under section 409A, and taxpayers
may rely on the guidance in this paragraph of the preamble for any
taxable year beginning after December 31, 2017, until the issuance of
proposed regulations under section 409A incorporating these
modifications and permitting taxpayers to rely on such proposed
regulations under section 409A.
Amounts payable under NQDC arrangements may consist of both
grandfathered amounts and non-grandfathered amounts. With respect to
these arrangements, employers may apply the guidance provided in the
previous two paragraphs of this preamble. Accordingly, the plan may be
amended to remove the provision requiring the corporation to delay the
payment of non-grandfathered amounts
[[Page 70370]]
if it is anticipated that the corporation's deduction with respect to
the payments will not be permitted under section 162(m);
notwithstanding such an amendment, the corporation may continue to
delay payment of the grandfathered amounts in accordance with
Sec. Sec. 1.409A-1(b)(4)(ii) and 1.409A-2(b)(7)(i).
VIII. Proposed Applicability Dates
A. General Applicability Date
Generally, these regulations are proposed to apply to compensation
that is otherwise deductible for taxable years beginning on or after
[DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER].
Taxpayers may choose to rely on these proposed regulations until the
applicability date of the final regulations, provided that taxpayers
apply these proposed regulations consistently and in their entirety.
Because these proposed regulations do not broaden the definition of
``covered employee'' as provided in Notice 2018-68 and do not restrict
the application of the definition of ``written binding contract'' as
provided in Notice 2018-68, except as provided by the special
applicability dates described in section VIII.B of this preamble,
taxpayers may no longer rely on Notice 2018-68 for taxable years ending
on or after December 20, 2019, but instead may rely on these proposed
regulations for those taxable years.
B. Special Applicability Dates
These regulations are proposed to include special applicability
dates covering certain aspects of the following provisions of the
proposed regulations:
1. Definition of covered employee.
2. Definition of predecessor of a publicly held corporation.
3. Definition of compensation.
4. Application of section 162(m) to a deduction for compensation
otherwise deductible for a taxable year ending on or after a privately
held corporation becomes a publicly held corporation.
5. Definitions of written binding contract and material
modification.
First, the definition of covered employee is proposed to apply to
taxable years ending on or after September 10, 2018, the publication
date of Notice 2018-68, which provided guidance on the definition of
covered employee. Notice 2018-68 also provided that the Treasury
Department and the IRS anticipate that the guidance in the notice will
be incorporated in future regulations that, with respect to the issues
addressed in the notice, will apply to any taxable year ending on or
after September 10, 2018. Because these proposed regulations adopt the
definition of covered employee in Notice 2018-68, the guidance on the
definition of covered employee in these proposed regulations is
proposed to apply to taxable years ending on or after September 10,
2018. The Treasury Department and the IRS recognize, however, that the
rules related to a corporation whose fiscal year and taxable year do
not end on the same date were not discussed in Notice 2018-68.
Accordingly, the proposed regulations provide that, for a corporation
whose fiscal and taxable years do not end on the same date, the rule
requiring the determination of the three most highly compensated
executive officers to be made pursuant to the rules under the Exchange
Act applies to taxable years beginning on or after December 20, 2019.
Second, the provisions defining a predecessor corporation of a
publicly held corporation are proposed to apply to corporate
transactions for which all events necessary for the transaction occur
on or after [DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. With respect to the rules that apply to corporations that
change from publicly held to privately held status or visa-versa, the
definition of the term predecessor corporation of a publicly held
corporation applies to a privately held corporation that again becomes
a publicly held corporation on or after [DATE OF PUBLICATION OF THE
FINAL RULE IN THE FEDERAL REGISTER]. Accordingly, depending on the
timing of any earlier transition from a publicly held corporation to a
privately held corporation, the publicly held corporation that existed
before the issuance of final regulations may be treated as a
predecessor of a privately held corporation that becomes a publicly
held corporation after the date of issuance of final regulations. Until
the applicability date of the final regulations, taxpayers may rely on
the definition of predecessor of a publicly held corporation in these
proposed regulations or a reasonable good faith interpretation of the
term ``predecessor.'' The Treasury Department and the IRS have
determined, however, that excluding the following target corporations
from the definition of the term ``predecessor'' in the following
situations is not a reasonable good faith interpretation of the
statute: (1) A publicly held target corporation the stock or assets of
which are acquired by another publicly held corporation in a
transaction to which section 381(a) applies, and (2) a publicly held
target corporation, at least 80% of the total voting power, and at
least 80% of the total value, of the stock of which is acquired by a
publicly held acquiring corporation (including an affiliated group). No
inference is intended regarding whether the treatment of a target
corporation as other than a ``predecessor'' in any other situation is a
reasonable good faith interpretation of the statute.
Third, as discussed in section IV.C. of this preamble, the rule
that the definition of compensation in proposed Sec. 1.162-33(c)(3)
includes an amount equal to the publicly held corporation's
distributive share of a partnership's deduction for compensation
expense attributable to the compensation paid by the partnership is
proposed to apply to any deduction for compensation that is otherwise
allowable for a taxable year ending on or after December 20, 2019. The
Treasury Department and the IRS are aware that arrangements currently
exist that reflect an understanding that the allocated deduction would
not be limited by section 162(m). Accordingly, this aspect of the
definition of compensation would not apply to compensation paid
pursuant to a written binding contract in effect on December 20, 2019
that is not materially modified after that date.
Fourth, the guidance on the applicability of section 162(m)(1) to
the deduction for any compensation otherwise deductible for a taxable
year ending on or after the date when a corporation becomes a publicly
held corporation is proposed to apply to corporations that become
publicly held after December 20, 2019. A corporation that was not a
publicly held corporation and then becomes a publicly held corporation
on or before December 20, 2019 may rely on the transition relief as
provided in Sec. 1.162-27(f)(1) until the earliest of the events
provided in Sec. 1.162-27(f)(2).
Fifth, the definitions of written binding contract and material
modification are proposed to apply to taxable years ending on or after
September 10, 2018, the publication date of Notice 2018-68, which
provided guidance defining these terms. Notice 2018-68 also provided
that the Treasury Department and IRS anticipated that the guidance in
the notice would be incorporated in future regulations that, with
respect to the issues addressed in the notice, would apply to any
taxable year ending on or after September 10, 2018. Because these
proposed regulations adopt the definitions of the terms ``written
binding contract'' and ``material modification'' that were
[[Page 70371]]
included in Notice 2018-68, the guidance on these definitions in these
proposed regulations is proposed to apply to taxable years ending on or
after September 10, 2018.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Pursuant to
the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby
certified that these proposed regulations would not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that section 162(m)(1) applies only
to publicly held corporations (for example, corporations that list
securities on a national securities exchange and are rarely small
entities) and only impacts those publicly held corporations that
compensate certain executive officers in excess of $1 million in a
taxable year. Notwithstanding this certification that the proposed
regulations would not have a significant economic impact on a
substantial number of small entities, the Treasury Department and the
IRS invite comments on the impacts these proposed regulations may have
on small entities. Pursuant to section 7805(f) of the Code, this
proposed rule has been submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
entities.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
Treasury and the IRS request comments on all aspects of the proposed
rules. All comments will be available at www.regulations.gov or upon
request.
A public hearing has been scheduled for March 9, 2020, beginning at
10 a.m. in the Auditorium of the Internal Revenue Building, 1111
Constitution Avenue NW, Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. For more information about having your name placed on
the building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit an outline of
the topics to be discussed and the time to be devoted to each topic by
February 18, 2020. Submit a signed paper or electronic copy of the
outline as prescribed in this preamble under the ADDRESSES heading. A
period of 10 minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving outlines has passed. Copies
of the agenda will be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Ilya Enkishev, Office
of Associate Chief Counsel (Employee Benefits, Exempt Organizations,
and Employment Taxes). However, other personnel from the Treasury
Department and the IRS participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.162-27 is amended by revising paragraphs (a) and
(j)(1) to read as follows:
Sec. 1.162-27 Certain employee remuneration in excess of $1,000,000
not deductible for taxable years beginning on or after January 1, 1994,
and for taxable years beginning prior to January 1, 2018
(a) Scope. This section provides rules for the application of the
$1 million deduction limitation under section 162(m)(1) for taxable
years beginning on or after January 1, 1994, and beginning prior to
January 1, 2018, and, as provided in paragraph (j) of this section, for
taxable years beginning after December 31, 2017. For rules concerning
the applicability of section 162(m)(1) to taxable years beginning after
December 31, 2017, see Sec. 1.162-33. Paragraph (b) of this section
provides the general rule limiting deductions under section 162(m)(1).
Paragraph (c) of this section provides definitions of generally
applicable terms. Paragraph (d) of this section provides an exception
from the deduction limitation for compensation payable on a commission
basis. Paragraph (e) of this section provides an exception for
qualified performance-based compensation. Paragraphs (f) and (g) of
this section provide special rules for corporations that become
publicly held corporations and payments that are subject to section
280G, respectively. Paragraph (h) of this section provides transition
rules, including the rules for contracts that are grandfathered and not
subject to section 162(m)(1). Paragraph (j) of this section contains
the effective date provisions, which also specify when these rules
apply to the deduction for compensation otherwise deductible in a
taxable year beginning after December 31, 2017. For rules concerning
the deductibility of compensation for services that are not covered by
section 162(m)(1) and this section, see section 162(a)(1) and Sec.
1.162-7. This section is not determinative as to whether compensation
meets the requirements of section 162(a)(1). For rules concerning the
deduction limitation under section 162(m)(6) applicable to certain
health insurance providers, see Sec. 1.162-31.
* * * * *
(j) Effective date--(1) In general. Section 162(m) and this section
apply to the deduction for compensation that is otherwise deductible by
the corporation in taxable years beginning on or after January 1, 1994,
and beginning prior to January 1, 2018. Section 162(m) and this section
also apply to compensation that is a grandfathered amount (as defined
in Sec. 1.162-33(g)) at the time it is paid to the covered employee.
For examples of the application of the rules of this section to
grandfathered amounts paid during taxable years beginning after
December 31, 2017, see Sec. 1.162-33(g).
* * * * *
0
Par. 3. Section 1.162-33 is added to read as follows:
Sec. 1.162-33 Certain employee remuneration in excess of $1,000,000
not deductible for taxable years beginning after December 31, 2017
(a) Scope. This section provides rules for the application of the
$1 million deduction limitation under section 162(m)(1) for taxable
years beginning after December 31, 2017. For rules concerning the
applicability of section 162(m)(1) to taxable years beginning on or
after January 1, 1994, and prior to January 1, 2018, see Sec. 1.162-
27. Paragraph (b) of this section provides the general rule limiting
deductions under section 162(m)(1). Paragraph (c)
[[Page 70372]]
of this section provides definitions of generally applicable terms.
Paragraph (d) of this section provides rules for determining when a
corporation becomes a publicly held corporation. Paragraph (e) of this
section provides rules for payments that are subject to section 280G.
Paragraph (f) of this section provides a special rule for coordination
with section 4985. Paragraph (g) of this section provides transition
rules, including the rules for contracts that are grandfathered.
Paragraph (h) of this section sets forth the effective date provisions.
For rules concerning the deductibility of compensation for services
that are not covered by section 162(m)(1) and this section, see section
162(a)(1) and Sec. 1.162-7. This section is not determinative as to
whether compensation meets the requirements of section 162(a)(1). For
rules concerning the deduction limitation under section 162(m)(6)
applicable to certain health insurance providers, see Sec. 1.162-31.
(b) Limitation on deduction. Section 162(m)(1) precludes a
deduction under chapter 1 of the Internal Revenue Code by any publicly
held corporation for compensation paid to any covered employee to the
extent that the compensation for the taxable year exceeds $1,000,000.
(c) Definitions--(1) Publicly held corporation--(i) General rule. A
publicly held corporation means any corporation that issues securities
required to be registered under section 12 of the Exchange Act or that
is required to file reports under section 15(d) of the Exchange Act. In
addition, a publicly held corporation means any S corporation (as
defined in section 1361(a)(1)) that issues securities that are required
to be registered under section 12(b) of the Exchange Act, or that is
required to file reports under section 15(d) of the Exchange Act. For
purposes of this section, whether a corporation is publicly held is
determined based solely on whether, as of the last day of its taxable
year, the securities issued by the corporation are required to be
registered under section 12 of the Exchange Act or the corporation is
required to file reports under section 15(d) of the Exchange Act.
Whether registration under the Exchange Act is required by rules other
than those of the Exchange Act is irrelevant to this determination. A
publicly traded partnership that is treated as a corporation under
section 7704 (or otherwise) is a publicly held corporation if, as of
the last day of its taxable year, its securities are required to be
registered under section 12 of the Exchange Act or it is required to
file reports under section 15(d) of the Exchange Act.
(ii) Affiliated groups--(A) In general. A publicly held corporation
includes an affiliated group of corporations, as defined in section
1504 (determined without regard to section 1504(b)) that includes one
or more publicly held corporations (as defined in paragraph (c)(1)(i)
of this section). In the case of an affiliated group that includes two
or more publicly held corporations as defined in paragraph (c)(1)(i) of
this section, each member of the affiliated group that is a publicly
held corporation as defined in paragraph (c)(1)(i) of this section is
separately subject to this section, and the affiliated group as a whole
is subject to this section. Thus, for example, assume that a publicly
held corporation (as defined in paragraph (c)(1)(i) of this section) is
a wholly-owned subsidiary of another publicly held corporation (as
defined in paragraph (c)(1)(i) of this section), which is a wholly-
owned subsidiary of a privately held corporation. In this case, the two
subsidiaries are separately subject to this section, and all three
corporations are members of an affiliated group that is subject to this
section. Furthermore, each subsidiary has its own set of covered
employees as defined in paragraphs (c)(2)(i) through (iv) of this
section (although it is possible that the same individual may be a
covered employee of both subsidiaries).
(B) Proration of amount disallowed as a deduction. If, in a taxable
year, a covered employee (as defined in paragraphs (c)(2)(i) through
(iv) of this section) of one member of an affiliated group is paid
compensation by more than one member of the affiliated group,
compensation paid by each member of the affiliated group is aggregated
with compensation paid to the covered employee by all other members of
the affiliated group (excluding compensation paid by any other publicly
held corporation in the affiliated group, as defined in paragraph
(c)(1)(i) of this section, of which the individual is also a covered
employee as defined in paragraphs (c)(2)(i) through (iv) of this
section). In the event that, in a taxable year, a covered employee (as
defined in paragraphs (c)(2)(i) through (iv) of this section) is paid
compensation by more than one publicly held corporation in an
affiliated group and is also a covered employee of more than one
publicly held payor corporation (as defined in paragraph (c)(1)(i) of
this section) in the affiliated group, the amount disallowed as a
deduction is determined separately with respect to each publicly held
corporation of which the individual is a covered employee. Any amount
disallowed as a deduction by this section must be prorated among the
payor corporations (excluding any other publicly held payor corporation
of which the individual is also a covered employee) in proportion to
the amount of compensation paid to the covered employee (as defined in
paragraphs (c)(2)(i) through (iv) of this section) by each such
corporation in the taxable year. This process is repeated for each
publicly held payor corporation of which the individual is a covered
employee.
(iii) Disregarded entities. For purposes of paragraph (c)(1) of
this section, a publicly held corporation includes a corporation that
owns an entity that is disregarded as an entity separate from its owner
within the meaning of Sec. 301.7701-2(c)(2)(i) of this chapter if the
disregarded entity issues securities required to be registered under
section 12(b) of the Exchange Act, or is required to file reports under
section 15(d) of the Exchange Act.
(iv) Qualified subchapter S subsidiaries. For purposes of paragraph
(c)(1) of this section, a publicly held corporation includes an S
corporation that owns a qualified subchapter S subsidiary as defined in
section 1361(b)(3)(B) (QSub) if the QSub issues securities required to
be registered under section 12(b) of the Exchange Act, or is required
to file reports under section 15(d) of the Exchange Act.
(v) Examples. The following examples illustrate the provisions of
this paragraph (c)(1). For each example, assume that no corporation is
a predecessor of a publicly held corporation within the meaning of this
paragraph (c)(2)(ii). Furthermore, for each example, unless provided
otherwise, a reference to a publicly held corporation means a publicly
held corporation as defined in paragraph (c)(1)(i) of this section.
Additionally, for each example, assume that the corporation is a
calendar year taxpayer and has a fiscal year ending December 31 for
reporting purposes under the Exchange Act. These examples are not
intended to provide guidance on the legal requirements of the
Securities Act and Exchange Act and the rules thereunder (17 CFR part
240).
(A) Example 1 (Corporation required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. Corporation Z plans
to issue debt securities in a public offering registered under the
Securities Act. Corporation Z is not required to file reports under
section 15(d) of the Exchange Act with respect to any other class of
securities and does not have another class of securities required to
be registered
[[Page 70373]]
under section 12 of the Exchange Act. On April 1, 2021, the
Securities Act registration statement for Corporation Z's debt
securities is declared effective by the SEC. As a result,
Corporation Z is required to file reports under section 15(d) of the
Exchange Act. Accordingly, as of December 31, 2021, the last day of
its taxable year, Corporation Z is required to file reports under
section 15(d) of the Exchange Act.
(2) Conclusion. Corporation Z is a publicly held corporation for
its 2021 taxable year because it is required to file reports under
section 15(d) of the Exchange Act as of the last day of its taxable
year.
(B) Example 2 (Corporation not required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. The facts are the
same as in paragraph (c)(1)(v)(A) of this section (Example 1),
except that, on January 1, 2022, pursuant to section 15(d) of the
Exchange Act, Corporation Z's obligation to file reports under
section 15(d) is automatically suspended for the fiscal year ending
December 31, 2022, because Corporation Z meets the statutory
requirements for an automatic suspension to file reports under
section 15(d). Accordingly, as of December 31, 2022, Corporation Z
is not required to file reports under section 15(d) of the Exchange
Act.
(2) Conclusion. Corporation Z is not a publicly held corporation
for its 2022 taxable year because it is not required to file reports
under section 15(d) of the Exchange Act as of as of the last day of
its taxable year.
(C) Example 3 (Corporation not required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. The facts are the
same as in paragraph (c)(1)(v)(B) of this section (Example 2),
except that, on January 1, 2022, pursuant to section 15(d) of the
Exchange Act, Corporation Z's obligation to file reports under
section 15(d) is not automatically suspended for the fiscal year
ending December 31, 2022 because Corporation Z does not meet the
statutory requirements for automatic suspension. Instead, on May 2,
2022, Corporation Z is eligible to suspend its section 15(d)
reporting obligation under Rule 12h-3 of the Exchange Act (17 CFR
240.12h-3) and files Form 15, Certification and Notice of
Termination of Registration under Section 12(g) of the Securities
Exchange Act of 1934 or Suspension of Duty to File Reports under
Sections 13 and 15(d) of the Securities Exchange Act of 1934 (or its
successor), to suspend its section 15(d) reporting obligation for
its fiscal year ending December 31, 2022. Accordingly, as of
December 31, 2022, Corporation Z is not required to file reports
under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation Z is not a publicly held corporation
for its 2022 taxable year because it is not required to file reports
under section 15(d) of the Exchange Act as of the last day of its
taxable year.
(D) Example 4 (Corporation required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. The facts are the
same as in paragraph (c)(1)(v)(C) of this section (Example 3),
except that, Corporation Z does not utilize Rule 12h-3 under the
Exchange Act (17 CFR 240.12h-3) to file a Form 15, Certification and
Notice of Termination of Registration under Section 12(g) of the
Securities Exchange Act of 1934 or Suspension of Duty to File
Reports under Sections 13 and 15(d) of the Securities Exchange Act
of 1934 (or its successor), to suspend its section 15(d) reporting
obligation during its fiscal year ending December 31, 2022.
Accordingly, Corporation Z's reporting obligation under section
15(d) of the Exchange Act is not suspended for its fiscal year
ending December 31, 2022.
(2) Conclusion. Corporation Z is a publicly held corporation for
its 2022 taxable year because it is required to file reports under
section 15(d) of the Exchange Act as of the last day of its taxable
year.
(E) Example 5 (Corporation required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. Corporation Y is a
wholly-owned subsidiary of Corporation X, which is required to file
reports under the Exchange Act. Corporation Y issued a class of debt
securities in a public offering registered under the Securities Act,
and therefore is required to file reports under Exchange Act Section
15(d), including for its fiscal year ending December 31, 2020.
Corporation Y has no other class of securities registered under the
Exchange Act. In its Form 10-K, Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 (or its successor),
for the 2020 fiscal year, Corporation Y may omit Item 11 Executive
Compensation (required by Part III of Form 10-K), which requires
disclosure of compensation of certain executive officers because it
is wholly-owned by Corporation X and the other conditions of General
Instruction I to Form 10-K are satisfied.
(2) Conclusion. Corporation Y is a publicly held corporation for
its 2020 taxable year because it is required to file reports under
section 15(d) of the Exchange Act as of the last day of its taxable
year.
(F) Example 6 (Corporation not required to file reports under
section 15(d) of the Exchange Act and not required to register
securities under section 12 of the Exchange Act)--(1) Facts.
Corporation A has a class of securities registered under section
12(g) of the Exchange Act. For its 2020 taxable year, Corporation A
is a publicly held corporation. On September 30, 2021, Corporation A
is eligible to terminate the registration of its securities under
section 12(g) of the Exchange Act pursuant to Rule 12g-4(a)(2) of
the Exchange Act (17 CFR 240.12g-4(a)(2)), but does not terminate
the registration of its securities prior to December 31, 2021.
Because Corporation A did not issue securities in a public offering
registered under the Securities Act, Corporation A is not required
to file reports under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation A is not a publicly held corporation
for its 2021 taxable year because, as of the last day of its taxable
year, the securities issued by Corporation A are not required to be
registered under section 12 of the Exchange Act and Corporation A is
not required to file reports under section 15(d) of the Exchange
Act.
(G) Example 7 (Corporation required to file reports under
section 15(d) of the Exchange Act)--(1) Facts. The facts are the
same as in paragraph (c)(1)(v)(F) of this section (Example 6),
except that Corporation A previously issued a class of securities in
a public offering registered under the Securities Act. Furthermore,
on October 1, 2021, Corporation A terminates the registration of its
securities under section 12(g) of the Exchange Act. Because
Corporation A issued a class of securities in a public offering
registered under the Securities Act and is not eligible to suspend
its reporting obligation under section 15(d) of the Exchange Act, as
of December 31, 2021, Corporation A is required to file reports
under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation A is a publicly held corporation for
its 2021 taxable year because it is required to file reports under
section 15(d) of the Exchange Act as of the last day of its taxable
year.
(H) Example 8 (Corporation not required to file reports under
section 15(d) of the Exchange Act and not required to register
securities under section 12 of the Exchange Act)--(1) Facts. On
November 1, 2021, Corporation B is an issuer with only one class of
equity securities. On November 5, 2021, Corporation B files a
registration statement for its equity securities under section 12(g)
of the Exchange Act. Corporation B's filing of its registration
statement is voluntary because the Exchange Act does not require
Corporation B to register its class of securities under section
12(g) of the Exchange Act based on the number and composition of its
record holders. On December 1, 2021, the Exchange Act registration
statement for Corporation B's securities is declared effective by
the SEC. As of December 31, 2021, the last day of its taxable year,
Corporation B continues to have its class of equity securities
registered voluntarily under section 12 of the Exchange Act.
Furthermore, Corporation B is not required to file reports under
section 15(d) of the Exchange Act because it did not register any
class of securities in a public offering under the Securities Act.
(2) Conclusion. Corporation B is not a publicly held corporation
for its 2021 taxable year because, as of the last day of that
taxable year, the securities issued by Corporation B are not
required to be registered under section 12 of the Exchange Act and
Corporation B is not required to file reports under section 15(d) of
the Exchange Act.
(I) Example 9 (Corporation not required to file reports under
section 15(d) of the Exchange Act and not required to register
securities under section 12 of the Exchange Act)--(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(H) of this section
(Example 8), except that, on December 31, 2022, because of a change
in circumstances, under the Exchange Act, Corporation B must
register its class of equity securities under section 12(g) of the
Exchange Act within 120 days of December 31, 2022. On February 1,
2023, the Exchange Act registration statement for Corporation B's
securities is declared effective by the SEC.
(2) Conclusion. Corporation B is not a publicly held corporation
for its 2022 taxable year because, as of the last day of that
taxable year, Corporation B is not required to file reports under
section 15(d) of the Exchange Act, and the class of equity
securities issued
[[Page 70374]]
by Corporation B is not yet required to be registered under section
12 of the Exchange Act. Corporation B has 120 days following
December 31, 2022, to file a registration statement to register its
class of equity securities under section 12(g) of the Exchange Act.
(J) Example 10 (Securities of foreign private issuer in the form
of ADRs traded in the over-the-counter market)--(1) Facts. For its
fiscal and taxable years ending December 31, 2021, Corporation W is
a foreign private issuer. Because Corporation W has not registered
an offer or sale of securities under the Securities Act, it is not
required to file reports under section 15(d) of the Exchange Act.
Corporation W qualifies for an exemption from registration of its
securities under section 12(g) of the Exchange Act pursuant to Rule
12g3-2(b) under the Exchange Act (17 CFR 240.12g3-2(b)). Corporation
W wishes to have its securities traded in the U.S. in the over-the-
counter market in the form of ADRs. Because Corporation W qualifies
for an exemption pursuant to Rule 12g3-2(b) under the Exchange Act
(17 CFR 240.12g3-2(b)), Corporation W is not required to register
its securities underlying the ADRs under section 12 of the Exchange
Act. However, the depositary bank is required to register the ADRs
under the Securities Act. Even though the depositary bank is
required to register the ADRs under the Securities Act, such
registration of the ADRs does not create a requirement for either
the depositary bank or Corporation W to file reports under section
15(d) of the Exchange Act. On February 3, 2021, the Securities Act
registration statement for the ADRs is declared effective by the
SEC. On February 4, 2021, Corporation W's ADRs begin trading in the
over-the-counter market. On December 31, 2021, the securities of
Corporation W are not required to be registered under Section 12 of
the Exchange Act because Corporation W qualifies for an exemption
pursuant to Rule 240.12g3-2(b) of the Exchange Act. Furthermore, on
December 31, 2021, Corporation W is not required to file reports
under section 15(d) of the Exchange Act.
(2) Conclusion. Corporation W is not a publicly held corporation
for its 2021 taxable year because, as of the last day of that
taxable year, the securities underlying the ADRs are not required to
be registered under section 12 of the Exchange Act and Corporation W
is not required to file reports under section 15(d) of the Exchange
Act. The conclusion would be the same if Corporation W had its
securities traded in the over-the-counter market other than in the
form of ADRs.
(K) Example 11 (Securities of foreign private issuer in the form
of ADRs quoted on Over the Counter Bulletin Board)--(1) Facts. The
facts are the same as in paragraph (c)(1)(v)(J) of this section
(Example 10), except that Corporation W has its securities quoted on
the Over the Counter Bulletin Board (OTCBB) in the form of ADRs.
Because Corporation W qualifies for an exemption pursuant to Rule
12g3-2(b) of the Exchange Act (17 CFR 240.12g3-2(b)), Corporation W
is not required to register its securities underlying the ADRs under
section 12 of the Exchange Act. However, the depositary bank is
required to register the ADRs under the Securities Act. Section
6530(b)(1) of the OTCBB Rules requires that a foreign equity
security may be quoted on the OTCBB only if the security is
registered with the SEC pursuant to section 12 of the Exchange Act
and the issuer of the security is current in its reporting
obligations. To comply with section 6530(b)(1) of the OTCBB Rules,
on February 5, 2021, Corporation W files a registration statement
for its class of securities underlying the ADRs under section 12(g)
of the Exchange Act. On February 26, 2021, the Exchange Act
registration statement for Corporation W's securities is declared
effective by the SEC. As of December 31, 2021, Corporation W is
subject to the reporting obligations under the section 12 of the
Exchange Act as a result of section 12 registration.
(2) Conclusion. Corporation W is not a publicly held corporation
for its 2021 taxable year because, as of the last day of that
taxable year, its ADRs and the securities underlying the ADRs are
not required by the Exchange Act to be registered under section 12,
and Corporation W is not required to file reports under section
15(d) of the Exchange Act. The conclusion would be the same if
Corporation W had its securities traded on the OTCBB other than in
the form of ADRs.
(L) Example 12 (Securities of foreign private issuer in the form
of ADRs listed on a national securities exchange without a capital
raising transaction)--(1) Facts. For its fiscal and taxable years
ending December 31, 2021, Corporation V is a foreign private issuer.
Corporation V wishes to list its securities on the New York Stock
Exchange (NYSE) in the form of ADRs without a capital raising
transaction. Under the Exchange Act, Corporation V is required to
register its securities underlying the ADRs under section 12(b) of
the Exchange Act. Because the ADRs and the deposited securities are
separate securities, the depositary bank is required to register the
ADRs under the Securities Act. On February 2, 2021, Corporation V's
registration statement under section 12(b) of the Exchange Act in
connection with the underlying securities, and the depositary bank's
registration statement under the Securities Act in connection with
the ADRs, are declared effective by the SEC. On March 1, 2021,
Corporation V's securities begin trading on the NYSE in the form of
ADRs. As of December 31, 2021, Corporation V is not required to file
reports under section 15(d) of the Exchange Act; however, the
securities underlying the ADRs are required to be registered under
section 12(b) of the Exchange Act.
(2) Conclusion. Corporation V is a publicly held corporation for
its 2021 taxable year because, as of the last day of that taxable
year, the securities underlying the ADRs are required to be
registered under section 12 of the Exchange Act. The conclusion
would be the same if Corporation V had its securities listed on the
NYSE other than in the form of ADRs.
(M) Example 13 (Securities of foreign private issuer in the form
of ADRs listed on a national securities exchange with a capital
raising transaction)--(1) Facts. The facts are the same as in
paragraph (c)(1)(v)(L) of this section (Example 12), except that
Corporation V wishes to raise capital and have its securities listed
on the NYSE in the form of ADRs. Corporation V is required to
register the offer of securities underlying the ADRs under the
Securities Act and to register the class of those securities under
section 12(b) of the Exchange Act. The depositary bank is required
to register the ADRs under the Securities Act. On February 2, 2021,
Corporation V's registration statements under the Securities Act and
section 12(b) of the Exchange Act, and the registration statement
for the ADRs under the Securities Act, are declared effective by the
SEC. As of December 31, 2021, Corporation V is not required to file
reports under section 15(d) of the Exchange Act; however, the
securities underlying the ADRs are required to be registered under
section 12(b) of the Exchange Act.
(2) Conclusion. Corporation V is a publicly held corporation for
its 2021 taxable year because, as of the last day of that taxable
year, its securities underlying the ADRs are required to be
registered under section 12 of the Exchange Act. The conclusion
would be the same if Corporation V had its securities listed on the
NYSE other than in the form of ADRs.
(N) Example 14 (Foreign private issuer incorporates subsidiary
in the United States to issue debt securities and subsequently
issues a guarantee)--(1) Facts. Corporation T is a corporation
incorporated in Country S (which is not the United States). For its
fiscal and taxable years ending December 31, 2021, Corporation T is
a foreign private issuer. Corporation T wishes to access the U.S.
capital markets. Corporation T incorporates Corporation U in the
United States to issue debt securities. On January 15, 2021, the SEC
declares Corporation U's Securities Act registration statement
effective. Corporation U is a wholly-owned subsidiary of Corporation
T. To enhance the credit of Corporation U and the marketability of
Corporation U's debt securities, Corporation T issues a guarantee of
Corporation U's securities and, as required, registers the guarantee
under the Securities Act on the registration statement that the SEC
declares effective on January 15, 2021. On December 31, 2021,
Corporations T and U are required to file reports under section
15(d) of the Exchange Act.
(2) Conclusion. Corporations T and U are publicly held
corporations for their 2021 taxable years because they are required
to file reports under section 15(d) of the Exchange Act as of the
last day of their taxable years.
(O) Example 15 (Affiliated group composed of two corporations,
one of which is a publicly held corporation)--(1) Facts. Employee D,
a covered employee of Corporation N, performs services and receives
compensation from Corporations N and O, members of an affiliated
group of corporations. Corporation N, the parent corporation, is a
publicly held corporation. Corporation O is a direct subsidiary of
Corporation N and is a privately held corporation. The total
compensation paid to Employee D from all affiliated group members is
$3,000,000 for the taxable year, of which Corporation N pays
$2,100,000 and Corporation O pays $900,000.
[[Page 70375]]
(2) Conclusion. Because the compensation paid by all affiliated
group members is aggregated for purposes of section 162(m)(1),
$2,000,000 of the aggregate compensation paid is nondeductible.
Corporations N and O each are treated as paying a ratable portion of
the nondeductible compensation. Thus, two thirds of each
corporation's payment will be nondeductible. Corporation N has a
nondeductible compensation expense of $1,400,000 ($2,100,000 x
$2,000,000/$3,000,000). Corporation O has a nondeductible
compensation expense of $600,000 ($900,000 x $2,000,000/$3,000,000).
(P) Example 16 (Affiliated group composed of two corporations,
one of which is a publicly held corporation)--(1) Facts. The facts
are the same as in paragraph (c)(1)(v)(O) of this section (Example
15), except that, Corporation O is a publicly held corporation and
Corporation N is a privately held corporation, and Employee D is a
covered employee of Corporation O (instead of Corporation N).
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(T) of this section (Example 15). Even though Corporation O
is a subsidiary that is a publicly held corporation, it is still a
member of the affiliated group comprised of Corporations N and O.
Accordingly, $2,000,000 of the aggregate compensation paid is
nondeductible. Thus, Corporations N and O each are treated as paying
a ratable portion of the nondeductible compensation.
(Q) Example 17 (Affiliated group composed of two publicly held
corporations)--(1) Facts. The facts are the same as in paragraph
(c)(1)(v)(O) of this section (Example 15), except that Corporation O
is also a publicly held corporation. As in paragraph (c)(1)(v)(O) of
this section (Example 15), Employee D is not a covered employee of
Corporation O.
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(O) of this section (Example 15). Even though Corporation O
is a subsidiary that is a publicly held corporation, it is still a
member of the affiliated group comprised of Corporations N and O.
Corporations N and O are payor corporations that are members of an
affiliated group for purposes of prorating the amount disallowed as
a deduction. Accordingly, $2,000,000 of the aggregate compensation
paid is nondeductible. Thus, Corporations N and O each are treated
as paying a ratable portion of the nondeductible compensation.
(R) Example 18 (Affiliated group composed of two publicly held
corporations)--(1) Facts. The facts are the same as in paragraph
(c)(1)(v)(Q) of this section (Example 17), except that Employee D is
also a covered employee of Corporation O.
(2) Conclusion. Even though Corporations N and O are each
publicly held corporations and separately subject to this section,
they are still members of the affiliated group comprised of
Corporations N and O. Because Employee D is a covered employee of
both Corporations N and O, which are each a separate publicly held
corporation, the determination of the amount disallowed as a
deduction is made separately for each publicly held corporation.
Accordingly, Corporation N has a nondeductible compensation expense
of $1,100,000 (the excess of $2,100,000 over $1,000,000), and
Corporation O has no nondeductible compensation expense because the
amount it paid to Employee D was below $1,000,000.
(S) Example 19 (Affiliated group composed of three corporations,
one of which is a publicly held corporation)--(1) Facts. Employee C,
a covered employee of Corporation P, performs services for, and
receives compensation from, Corporations P, Q, and R, members of an
affiliated group of corporations. Corporation P, the parent
corporation, is a publicly held corporation. Corporation Q is a
direct subsidiary of Corporation P, and Corporation R is a direct
subsidiary of Corporation Q. Corporations Q and R are both privately
held corporations. The total compensation paid to Employee C from
all affiliated group members is $3,000,000 for the taxable year, of
which Corporation P pays $1,500,000, Corporation Q pays $900,000,
and Corporation R pays $600,000.
(2) Conclusion. Because the compensation paid by all affiliated
group members is aggregated for purposes of section 162(m)(1),
$2,000,000 of the aggregate compensation paid is nondeductible.
Corporations P, Q, and R are each treated as paying a ratable
portion of the nondeductible compensation. Thus, two thirds of each
corporation's payment will be nondeductible. Corporation P has a
nondeductible compensation expense of $1,000,000 ($1,500,000 x
$2,000,000/$3,000,000). Corporation Q has a nondeductible
compensation expense of $600,000 ($900,000 x $2,000,000/$3,000,000).
Corporation R has a nondeductible compensation expense of $400,000
($600,000 x $2,000,000/$3,000,000).
(T) Example 20 (Affiliated group composed of three corporations,
one of which is a publicly held corporation)--(1) Facts. The facts
are the same as in paragraph (c)(1)(v)(S) of this section (Example
19), except that Corporation Q is a publicly held corporation and
Corporation P is a privately held corporation, and Employee C is a
covered employee of Corporation Q (instead of Corporation P).
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(S) of this section (Example 19). Even though Corporation Q
is a subsidiary that is a publicly held corporation, it is still a
member of the affiliated group comprised of Corporations P, Q, and
R. Accordingly, $2,000,000 of the aggregate compensation paid is
nondeductible. Thus, Corporations P, Q, and R are each treated as
paying a ratable portion of the nondeductible compensation.
(U) Example 21 (Affiliated group composed of three corporations,
two of which are publicly held corporations)--(1) Facts. The facts
are the same as in paragraph (c)(1)(v)(T) of this section (Example
20), except that Corporation R is also a publicly held corporation.
As in paragraph (c)(1)(v)(T) of this section (Example 20),
Corporation Q is a publicly held corporation, Corporation P is a
privately held corporation, and Employee C is a covered employee of
Corporation Q but not a covered employee of Corporation R.
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(T) of this section (Example 20). Even though Corporation R
is a subsidiary that is a publicly held corporation, it is still a
member of the affiliated group comprised of Corporations P, Q, and
R. Accordingly, $2,000,000 of the aggregate compensation paid is
nondeductible. Thus, Corporations P, Q, and R are each treated as
paying a ratable portion of the nondeductible compensation.
(V) Example 22 (Affiliated group composed of three publicly held
corporations)--(1) Facts. The facts are the same as in paragraph
(c)(1)(v)(S) of this section (Example 19), except that, Corporations
Q and R are also publicly held corporations, and Employee C is a
covered employee of both Corporations P and Q, but is not a covered
employee of Corporation R.
(2) Conclusion. Even though Corporations Q and R are
subsidiaries that are publicly held corporations and separately
subject to this section, they are still members of the affiliated
group comprised of Corporations P, Q, and R. Because Employee C is a
covered employee of both Corporations P and Q, the determination of
the amount disallowed as a deduction is prorated among Corporation P
and R, and separately prorated among Corporations Q and R. With
respect to Corporations P and R, $1,100,000 of the aggregate
compensation is nondeductible (the difference between the total
compensation of $2,100,000 paid by Corporations P and R and the
$1,000,000 deduction limitation). Corporations P and R are each
treated as paying a ratable portion of the nondeductible
compensation. Accordingly, Corporation P has a nondeductible
compensation expense of $785,714 ($1,500,000 x $1,100,000/
$2,100,000), and Corporation R has a nondeductible compensation
expense of $314,285 ($600,000 x $1,100,000/$2,100,000). With respect
to Corporations Q and R, $500,000 of the aggregate compensation is
nondeductible (the difference between the total compensation of
$1,500,000 paid by Corporations Q and R and the $1,000,000 deduction
limitation). Accordingly, Corporation Q has a nondeductible
compensation expense of $300,000 ($900,000 x $500,000/$1,500,000),
and Corporation R has a nondeductible compensation expense of
$200,000 ($600,000 x $500,000/$1,500,000). The total amount of
nondeductible compensation expense with respect to Corporation R is
$514,285.
(W) Example 23 (Affiliated group composed of three publicly held
corporations)--(1) Facts. The facts are the same as in paragraph
(c)(1)(v)(V) of this section (Example 22), except that Employee C
does not perform any services for Corporation R and does not receive
any compensation from Corporation R.
(2) Conclusion. Even though Corporations Q and R are
subsidiaries that are publicly held corporations and separately
subject to this section, they are still members of the affiliated
group comprised of Corporations P, Q, and R. Because Employee C
performs services only for Corporations P and Q and because Employee
C is a covered employee of both Corporations P and Q, which are each
a separate publicly held corporation, the determination of the
amount disallowed as a deduction is made separately for each
[[Page 70376]]
publicly held corporation. Accordingly, Corporation P has a
nondeductible compensation expense of $500,000 (the excess of
$1,500,000 over $1,000,000), and Corporation Q has no nondeductible
compensation expense because the amount it paid to Employee C was
below $1,000,000.
(X) Example 24 (Affiliated group composed of three corporations,
one of which is a publicly held corporation--(1) Facts. The facts
are the same as in paragraph (c)(1)(v)(S) of this section (Example
19), except that Corporation R is a direct subsidiary of Corporation
P instead of being a direct subsidiary of Corporation Q.
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(S) of this section (Example 19). Corporations P, Q, and R
are members of an affiliated group. Accordingly, $2,000,000 of the
aggregate compensation paid is nondeductible. Thus, Corporations P,
Q, and R are each treated as paying a ratable portion of the
nondeductible compensation.
(Y) Example 25 (Affiliated group composed of three publicly held
corporations)--(1) Facts. The facts are the same as in paragraph
(c)(1)(v)(X) of this section (Example 24), except that Corporations
Q and R are also publicly held corporations, and Employee C is a
covered employee of both Corporations P and Q.
(2) Conclusion. The result is the same as in paragraph
(c)(1)(v)(V) of this section (Example 22). Even though Corporations
Q and R are subsidiaries that are publicly held corporations and
separately subject to this section, they are still members of the
affiliated group comprised of Corporations P, Q, and R. Because
Employee C is a covered employee of both Corporations P and Q, the
determination of the amount disallowed as a deduction is prorated
among Corporation P and R, and separately among Corporations Q and
R.
(Z) Example 26 (Disregarded entity)--(1) Facts. Corporation G is
a privately held corporation for its 2020 taxable year. Entity H, a
limited liability company, is wholly-owned by Corporation G and is
disregarded as an entity separate from its owner under Sec.
301.7701-2(c)(2)(i). As of December 31, 2020, Entity H is required
to file reports under section 15(d) of the Exchange Act.
(2) Conclusion. Because Entity H is required to file reports
under section 15(d) of the Exchange Act and is disregarded as an
entity separate from its owner Corporation G, Corporation G is a
publicly held corporation under paragraph (c)(1)(iii) of this
section for its 2020 taxable year.
(2) Covered employee--(i) General rule. Except as provided in
paragraph (c)(2)(v) of this section, with respect to a publicly held
corporation as defined in paragraph (c)(1) of this section (without
regard to paragraph (c)(1)(ii) of this section), for the publicly held
corporation's taxable year, a covered employee means any of the
following--
(A) The principal executive officer (PEO) or principal financial
officer (PFO) of the publicly held corporation serving at any time
during the taxable year, including individuals acting in either such
capacity.
(B) The three highest compensated executive officers of the
publicly held corporation for the taxable year (other than the
principal executive officer or principal financial officer, or an
individual acting in such capacity), regardless of whether the
executive officer is serving at the end of the publicly held
corporation's taxable year, and regardless of whether the executive
officer's compensation is subject to disclosure for the last completed
fiscal year under the executive compensation disclosure rules under the
Exchange Act. The amount of compensation used to identify the three
most highly compensated executive officers for the taxable year is
determined pursuant to the executive compensation disclosure rules
under the Exchange Act (using the taxable year as the fiscal year for
purposes of making the determination), regardless of whether the
corporation's fiscal year and taxable year end on the same date.
(C) Any individual who was a covered employee of the publicly held
corporation (or any predecessor of a publicly held corporation, as
defined in paragraph (c)(2)(ii) of this section) for any preceding
taxable year beginning after December 31, 2016. For taxable years
beginning prior to January 1, 2018, covered employees are identified in
accordance with the rules in Sec. 1.162-27(c)(2).
(ii) Predecessor of a publicly held corporation--(A) Publicly held
corporations that become privately held. For purposes of this paragraph
(c)(2)(ii), a predecessor of a publicly held corporation includes a
publicly held corporation that, after becoming a privately held
corporation, again becomes a publicly held corporation for a taxable
year ending before the 36-month anniversary of the due date for the
corporation's U.S. Federal income tax return (disregarding any
extensions) for the last taxable year for which the corporation was
previously publicly held.
(B) Corporate reorganizations. A predecessor of a publicly held
corporation includes a publicly held corporation the stock or assets of
which are acquired in a corporate reorganization (as defined in section
368(a)(1)).
(C) Corporate divisions. A predecessor of a publicly held
corporation includes a publicly held corporation that is a distributing
corporation (within the meaning of section 355(a)(1)(A)) that
distributes the stock of a controlled corporation (within the meaning
of section 355(a)(1)(A)) to its shareholders in a distribution or
exchange qualifying under section 355(a)(1) (corporate division). The
rule of this paragraph (c)(2)(ii)(C) applies only with respect to
covered employees of the distributing corporation who commence the
performance of services for the controlled corporation (or for a
corporation affiliated with the controlled corporation that receives
stock of the controlled corporation in the corporate division) within
the period beginning 12 months before and ending 12 months after the
distribution.
(D) Affiliated groups. A predecessor of a publicly held corporation
includes a publicly held corporation that becomes a member of an
affiliated group (as defined in paragraph (c)(1)(ii) of this section).
(E) Asset acquisitions. If a publicly held corporation, including
one or more members of an affiliated group as defined in paragraph
(c)(1)(ii) of this section (acquiror), acquires at least 80% of the
operating assets (determined by fair market value on the date of
acquisition) of another publicly held corporation (target), then the
target is a predecessor of the acquiror. For an acquisition of assets
that occurs over time, only assets acquired within a 12-month period
are taken into account to determine whether at least 80% of the
target's operating assets were acquired. However, this 12-month period
is extended to include any continuous period that ends on, or begins
on, any day during which the acquiror has an arrangement to purchase,
directly or indirectly, assets of the target. Additions to the assets
of target by a shareholder made as part of a plan or arrangement to
avoid the application of this subsection to acquiror's purchase of
target's assets are disregarded in applying this paragraph. This
paragraph (c)(2)(ii)(E) applies only with respect to covered employees
of the target who commence the performance of services for the acquiror
(or a corporation affiliated with the acquiror) within the period
beginning 12 months before and ending 12 months after the date of the
transaction as defined in paragraph (c)(2)(ii)(I) of this section
(incorporating any extensions to the 12-month period made pursuant to
this paragraph).
(F) Predecessor of a predecessor. For purposes of this paragraph
(c)(2)(ii), a reference to a predecessor of a corporation includes each
predecessor of the corporation and the predecessor or predecessors of
any prior predecessor or predecessors.
(G) Corporations that are not publicly held at the time of the
transaction and sequential transactions--(1) Predecessor corporation is
not publicly held at the time of the transaction. If a corporation that
was previously publicly held (the
[[Page 70377]]
first corporation) would be a predecessor to another corporation (the
second corporation) under the rules of this paragraph (c)(2)(ii) but
for the fact that it is not a publicly held corporation at the time of
the relevant transaction (or transactions), the first corporation is a
predecessor of a publicly held corporation if the second corporation is
a publicly held corporation at the time of the relevant transaction (or
transactions) and the relevant transaction (or transactions) take place
during a taxable year ending before the 36-month anniversary of the due
date for the first corporation's U.S. Federal income tax return
(excluding any extensions) for the last taxable year for which the
first corporation was previously publicly held.
(2) Second corporation is not publicly held at the time of the
transaction. If a corporation that is publicly held (the first
corporation) at the time of the relevant transaction (or transactions)
would be a predecessor to another corporation (the second corporation)
under the rules of this paragraph (c)(2)(ii) but for the fact that the
second corporation is not a publicly held corporation at the time of
the relevant transaction (or transactions), the first corporation is a
predecessor of a publicly held corporation if the second corporation
becomes a publicly held corporation for a taxable year ending before
the 36-month anniversary of the due date for the first corporation's
U.S. Federal income tax return (excluding any extensions) for the first
corporation's last taxable year in which the transaction is taken into
account.
(3) Neither corporation is publicly held at the time of the
transaction. If a corporation that was previously publicly held (the
first corporation) would be a predecessor to another corporation (the
second corporation) under the rules of this paragraph (c)(2)(ii) but
for the fact that neither it nor the second corporation is a publicly
held corporation at the time of the relevant transaction (or
transactions), the first corporation is a predecessor of a publicly
held corporation if the second corporation becomes a publicly held
corporation for a taxable year ending before the 36-month anniversary
of the due date for the first corporation's U.S. Federal income tax
return (excluding any extensions) for the last taxable year for which
the first corporation was previously publicly held.
(4) Sequential transactions. If a corporation that was previously
publicly held (the first corporation) would be a predecessor to another
corporation (the second corporation) under the rules of this paragraph
(c)(2)(ii) but for the fact that the first corporation is (or its
assets are) transferred to one or more intervening corporations prior
to being transferred to the second corporation, and if each intervening
corporation would be a predecessor of a publicly held corporation with
respect to the second corporation if the intervening corporation or
corporations were publicly held corporations, then paragraphs
(c)(2)(ii)(G)(1) through (3) of this section also apply without regard
to the intervening corporations.
(H) Elections under sections 336(e) and 338. For purposes of this
paragraph (c)(2), when a corporation makes an election to treat as an
asset purchase either the sale, exchange, or distribution of stock
pursuant to regulations under section 336(e) or the purchase of stock
pursuant to regulations under section 338, the corporation that issued
the stock is treated as the same corporation both before and after such
transaction.
(I) Date of transaction. For purposes of this paragraph (c)(2)(ii),
the date that a transaction is treated as having occurred is the date
on which all events necessary for the transaction to be described in
the relevant provision have occurred.
(J) Publicly traded partnership. For purposes of applying this
paragraph (c)(2)(ii), a publicly traded partnership is a predecessor of
a publicly held corporation if under the same facts and circumstances a
corporation substituted for the publicly traded partnership would be a
predecessor of the publicly held corporation, and at the time of the
transaction the publicly traded partnership is treated as a publicly
held corporation as defined in paragraph (c)(1)(i) of this section. In
making this determination, the rules in paragraphs (c)(2)(ii)(A)
through (I) of this section apply to publicly traded partnerships by
analogy.
(iii) Disregarded entities. If a publicly held corporation under
paragraph (c)(1) of this section owns an entity that is disregarded as
an entity separate from its owner under Sec. 301.7701-2(c)(2)(i) of
this chapter, then the covered employees of the publicly held
corporation are determined pursuant to paragraphs (c)(2)(i) and (ii) of
this section. The executive officers of the entity that is disregarded
as an entity separate from its corporate owner under Sec. 301.7701-
2(c)(2)(i) of this chapter are neither covered employees of the entity
nor of the publicly held corporation unless they meet the definition of
covered employee in paragraphs (c)(2)(i) and (ii) of this section with
respect to the publicly held corporation, in which case they are
covered employees for its taxable year.
(iv) Qualified subchapter S subsidiaries. If a publicly held
corporation under paragraph (c)(1) of this section owns an entity that
is a QSub under section 1361(b)(3)(B), then the covered employees of
the publicly held corporation are determined pursuant to paragraphs
(c)(2)(i) and (ii) of this section. The executive officers of the QSub
are neither covered employees of the QSub nor of the publicly held
corporation unless they meet the definition of covered employee in
paragraphs (c)(2)(i) and (ii) of this section with respect to the
publicly held corporation, in which case they are covered employees for
its taxable year.
(v) Covered employee of an affiliated group. A person who is
identified as a covered employee in paragraphs (c)(2)(i) through (iv)
of this section for a publicly held corporation's taxable year is also
a covered employee for the taxable year of a publicly held corporation
as defined in paragraph (c)(1)(ii) of this section.
(vi) Examples. The following examples illustrate the provisions of
this paragraph (c)(2). For each example, assume that the corporation
has a taxable year that is a calendar year and has a fiscal year ending
December 31 for reporting purposes under the Exchange Act.
Additionally, for each example, unless explicitly provided, assume that
none of the employees were covered employees for any taxable year
preceding the first taxable year set forth in that example (since being
a covered employee for a preceding taxable year would provide a
separate and independent basis for classifying that employee as a
covered employee for a subsequent taxable year).
(A) Example 1 (Covered employees of members of an affiliated
group)--(1) Facts. Corporations A, B, and C are direct wholly-owned
subsidiaries of Corporation D. Corporation D is a publicly held
corporation as defined in paragraph (c)(1)(i) of this section
because its class of securities is required to be registered under
section 12 of the Exchange Act as of December 31, 2020. Corporation
A is a publicly held corporation as defined in paragraph (c)(1)(i)
of this section because it is required to file reports under section
15(d) of the Exchange Act as of December 31, 2020. Corporations B
and C are not publicly held corporations for their 2020 taxable
years. Employee E served as the PEO of Corporation D from January 1,
2020, to March 31, 2020. Employee F served as the PEO of Corporation
D from April 1, 2020, to December 31, 2020. Employee G served as the
PEO of Corporation A for its entire 2020 taxable year. Employee H
served as the PEO of Corporation B for its entire 2020 taxable year.
Employee I served as the PEO of Corporation C for its entire 2020
taxable year. From April 1, 2020, through September 30,
[[Page 70378]]
2020, Employee E served as an advisor (not as a PEO) to Employee I
and received compensation from Corporation C for these services. In
2020, all four corporations paid compensation to their respective
PEOs.
(2) Conclusion (Employees F and E). Because both Employees E and
F served as the PEO during Corporation D's 2020 taxable year, both
Employees E and F are covered employees for Corporation D's 2020 and
subsequent taxable years. Corporations D and C are members of an
affiliated group as defined in paragraph (c)(1)(ii) of this section.
Because Employee E received compensation from Corporations D and C,
the compensation paid by both corporations is aggregated. Any amount
disallowed as a deduction by this section is prorated between
Corporations D and C in proportion to the amount of compensation
paid to Employee E by each corporation in 2020.
(3) Conclusion (Employee G). Because Employee G served as a PEO
of Corporation A, a publicly held corporation, Employee G is a
covered employee of Corporation A for its 2020 and subsequent
taxable years.
(4) Conclusion (Employee H). Even though Employee H served as
the PEO of Corporation B, Employee H is not a covered employee of
Corporation B for its 2020 taxable year, because Corporation B is
considered a publicly held corporation solely by reason of being a
member of an affiliated group as defined in paragraph (c)(1)(ii) of
this section.
(5) Conclusion (Employee I). Even though Employee I served as
the PEO of Corporation C, Employee I is not a covered employee of
Corporation C for its 2020 taxable year, because Corporation C is
considered a publicly held corporation solely by reason of being a
member of an affiliated group as defined in paragraph (c)(1)(ii) of
this section. The aggregation of the compensation paid to Employee E
by Corporations D and C (for purposes of determining the amount of
deduction disallowed by this section) is immaterial to determining
whether Employee I is a covered employee of Corporation C.
(B) Example 2 (Covered employees of a publicly held
corporation)--(1) Facts. Corporation J is a publicly held
corporation. Corporation J is not a smaller reporting company or
emerging growth company for purposes of reporting under the Exchange
Act. For 2020, Employee K served as the sole PEO of Corporation J
and Employees L and M both served as the PFO of Corporation J at
different times during the year. Employees N, O, and P were,
respectively, the first, second, and third highest compensated
executive officers of Corporation J for 2020 other than the PEO and
PFO, and all three retired before the end of 2020. Employees Q, R,
and S were, respectively, Corporation J's fourth, fifth, and sixth
highest compensated executive officers other than the PEO and PFO
for 2020, and all three were serving at the end of 2020. On March 1,
2021, Corporation J filed its Form 10-K, Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 with the
SEC. With respect to Item 11, Executive Compensation (as required by
Part III of Form 10-K, or its successor), Corporation J disclosed
the compensation of Employee K for serving as the PEO, Employees L
and M for serving as the PFO, and Employees Q, R, and S pursuant to
Item 402 of Regulation S-K, 17 CFR 229.402(a)(3)(iii). Corporation J
also disclosed the compensation of Employees N and O pursuant to
Item 402 of Regulation S-K, 17 CFR 229.402(a)(3)(iv).
(2) Conclusion (PEO). Because Employee K served as the PEO
during 2020, Employee K is a covered employee for Corporation J's
2020 taxable year.
(3) Conclusion (PFO). Because Employees L and M served as the
PFO during 2020, Employees L and M are covered employees for
Corporation J's 2020 taxable year.
(4) Conclusion (Three Highest Compensated Executive Officers).
Even though the executive compensation disclosure rules under the
Exchange Act require Corporation J to disclose the compensation of
Employees N, O, Q, R, and S for 2020, Corporation J's three highest
compensated executive officers who are covered employees for its
2020 taxable year are Employees N, O, and P, because these are the
three highest compensated executive officers other than the PEO and
PFO for 2020.
(C) Example 3 (Covered employees of a smaller reporting
company)--(1) Facts. The facts are the same as in paragraph
(c)(2)(vi)(B) of this section (Example 2), except that Corporation J
is a smaller reporting company or emerging growth company for
purposes of reporting under the Exchange Act. Accordingly, with
respect to Item 11, Executive Compensation (as required by Part III
of Form 10-K, or its successor), Corporation J disclosed the
compensation of Employee K for serving as the PEO, Employees Q and R
pursuant to Item 402(m) of Regulation S-K, 17 CFR 229.402(m)(2)(ii),
and Employees N and O pursuant to Item 402(m) of Regulation S-K, 17
CFR 229.402(m)(2)(iii).
(2) Conclusion. The result is the same as in paragraph
(c)(2)(vi)(L) of this section (Example 2). For purposes of
identifying a corporation's covered employees, it is not relevant
whether the reporting obligation under the Exchange Act for smaller
reporting companies and emerging growth companies apply to the
corporation, nor is it relevant whether the specific executive
officers' compensation must be disclosed pursuant to the disclosure
rules under the Exchange Act applicable to the corporation.
(D) Example 4 (Covered employees of a publicly held corporation
that is not required to file a Form 10-K)--(1) Facts. The facts are
the same as in paragraph (c)(2)(vi)(B) of this section (Example 2),
except that on February 4, 2021, Corporation J files Form 15,
Certification and Notice of Termination of Registration under
Section 12(g) of the Securities Exchange Act of 1934 or Suspension
of Duty to File Reports under Sections 13 and 15(d) of the
Securities Exchange Act of 1934 (or its successor), to terminate the
registration of its securities. Corporation J's duty to file reports
under Section 13(a) of the Exchange Act is suspended upon the filing
of the Form 15 and, as a result, Corporation J is not required to
file a Form 10-K and disclose the compensation of its executive
officers for 2020.
(2) Conclusion. The result is the same as in paragraph
(c)(2)(vi)(B) of this section (Example 2). Covered employees include
executive officers of a publicly held corporation even if the
corporation is not required to disclose the compensation of its
executive officers under the Exchange Act. Therefore, Employees K,
L, M, N, O, and P are covered employees for 2020. The conclusion
would be different if Corporation J filed Form 15, Certification and
Notice of Termination of Registration under Section 12(g) of the
Securities Exchange Act of 1934 or Suspension of Duty to File
Reports under Sections 13 and 15(d) of the Securities Exchange Act
of 1934 (or its successor), to terminate the registration of its
securities prior to December 31, 2020. In that case, Corporation J
would not be a publicly held corporation for its 2020 taxable year,
and, therefore, Employees K, L, M, N, O, and P would not be covered
employees for Corporation J's 2020 taxable year.
(E) Example 5 (Covered employees of two publicly held
corporations after a corporate transaction)--(1) Facts. Corporation
T is a domestic publicly held corporation for its 2019 taxable year.
Corporation U is a domestic privately held corporation for its 2019
and 2020 taxable years. On July 31, 2020, Corporation U acquires for
cash 80% of the only class of outstanding stock of Corporation T.
The group (comprised of Corporations U and T) elects to file a
consolidated Federal income tax return. As a result of this
election, Corporation T has a short taxable year ending on July 31,
2020. Corporation T does not change its fiscal year for reporting
purposes under the Exchange Act to correspond to the short taxable
year. Corporation T remains a domestic publicly held corporation for
its short taxable year ending on July 31, 2020, and its subsequent
taxable year ending on December 31, 2020, for which it files a
consolidated Federal income tax return with Corporation U. For
Corporation T's taxable year ending July 31, 2020, Employee V serves
as the only PEO, and Employee W serves as the only PFO. Employees X,
Y, and Z are the three most highly compensated executive officers of
Corporation T for the taxable year ending July 31, 2020, other than
the PEO and PFO. As a result of the acquisition, effective July 31,
2020, Employee V ceases to serve as the PEO of Corporation T.
Instead, Employee AA begins serving as the PEO of Corporation T on
August 1, 2020. Employee V continues to provide services for
Corporation T and never serves as PEO again (or as an individual
acting in such capacity). For Corporation T's taxable year ending
December 31, 2020, Employee AA serves as the only PEO, and Employee
W serves as the only PFO. Employees X, Y, and Z continue to serve as
executive officers of Corporation T during the taxable year ending
December 31, 2020. Employees BB, CC, and DD are the three most
highly compensated executive officers of Corporation T, other than
the PEO and PFO, for the taxable year ending December 31, 2020.
(2) Conclusion (Employee V). Because Employee V served as the
PEO during Corporation T's short taxable year ending July 31, 2020,
Employee V is a covered
[[Page 70379]]
employee for Corporation T's short taxable year ending July 31,
2020. Furthermore, Employee V is a covered employee for Corporation
T's short taxable year ending July 31, 2020, even though Employee
V's compensation is required to be disclosed pursuant to the
executive compensation disclosure rules under the Exchange Act only
for the fiscal year ending December 31, 2020. Because Employee V was
a covered employee for Corporation T's short taxable year ending
July 31, 2020, Employee V is also a covered employee for Corporation
T's short taxable year ending December 31, 2020.
(3) Conclusion (Employee W). Because Employee W served as the
PFO during Corporation T's short taxable years ending July 31, 2020,
and December 31, 2020, Employee W is a covered employee for both
taxable years. Furthermore, Employee W is a covered employee for
Corporation T's short taxable year ending July 31, 2020, even though
Employee W's compensation is required to be disclosed pursuant to
the executive compensation disclosure rules under the Exchange Act
only for the fiscal year ending December 31, 2020. Employee W would
be a covered employee for Corporation T's short taxable year ending
December 31, 2020, even if Employee W did not serve as the PFO
during this taxable year because Employee W was a covered employee
for Corporation T's short taxable year ending July 31, 2020.
(4) Conclusion (Employee AA). Because Employee AA served as the
PEO during Corporation T's short taxable year ending December 31,
2020, Employee AA is a covered employee for this taxable year.
(5) Conclusion (Employees X, Y, and Z). Employees X, Y, and Z
are covered employees for Corporation T's short taxable years ending
July 31, 2020, and December 31, 2020. Employees X, Y, and Z are
covered employees for Corporation T's short taxable year ending July
31, 2020, because these employees are the three highest compensated
executive officers for this taxable year. Employees X, Y, and Z are
covered employees for Corporation T's short taxable year ending
December 31, 2020, because they were covered employees for
Corporation T's short taxable year ending July 31, 2020.
Accordingly, Employees X, Y, and Z would be covered employees for
Corporation T's short taxable years ending July 31, 2020, and
December 31, 2020, even if their compensation would not be required
to be disclosed pursuant to the executive compensation disclosure
rules under the Exchange Act.
(6) Conclusion (Employees BB, CC, and DD). Employees BB, CC, and
DD are covered employees for Corporation T's short taxable year
ending December 31, 2020 because these employees are the three
highest compensated executive officers for this taxable year.
(F) Example 6 (Predecessor of a publicly held corporation)--(1)
Facts. Corporation EE is a publicly held corporation for its 2021
taxable year. Corporation EE is a privately held corporation for its
2022 and 2023 taxable years. For its 2024 taxable year, Corporation
EE is a publicly held corporation.
(2) Conclusion. Corporation EE is a predecessor of a publicly
held corporation within the meaning of paragraph (c)(2)(ii)(A) of
this section because it became a publicly held corporation for a
taxable year ending prior to April 15, 2025. Therefore, for
Corporation EE's 2024 taxable year, the covered employees of
Corporation EE include the covered employees of Corporation EE for
its 2021 taxable year and any additional covered employees
determined pursuant to paragraph (c)(2) of this section.
(G) Example 7 (Predecessor of a publicly held corporation)--(1)
Facts. The facts are the same as in paragraph (c)(2)(vi)(F) of this
section (Example 6), except that Corporation EE remains a privately
held corporation until it becomes a publicly held corporation for
its 2027 taxable year.
(2) Conclusion. Corporation EE is not a predecessor of a
publicly held corporation within the meaning of paragraph
(c)(2)(ii)(A) of this section because it became a publicly held
corporation for a taxable year ending after April 15, 2025.
Therefore, any covered employee of Corporation EE for its 2021
taxable year is not a covered employee of Corporation EE for its
2027 taxable year due to that individual's status as a covered
employee of Corporation EE for a preceding taxable year beginning
after December 31, 2016 (but may be a covered employee due to status
during the 2027 taxable year).
(H) Example 8 (Predecessor of a publicly held corporation that
is party to a merger)--(1) Facts. On June 30, 2021, Corporation FF
(a publicly held corporation) merged into Corporation GG (a publicly
held corporation) in a transaction that qualifies as a
reorganization under section 368(a)(1)(A), with Corporation GG as
the surviving corporation. As a result of the merger, Corporation FF
has a short taxable year ending June 30, 2021. Corporation FF is a
publicly held corporation for this short taxable year. Corporation
GG does not have a short taxable year and is a publicly held
corporation for its 2021 taxable year.
(2) Conclusion. Corporation FF is a predecessor of a publicly
held corporation within the meaning of paragraph (c)(2)(ii)(B) of
this section. Therefore, any covered employee of Corporation FF for
its short taxable year ending June 30, 2021, is a covered employee
of Corporation GG for its 2021 taxable year. Accordingly, for
Corporation GG's 2021 and subsequent taxable years, the covered
employees of Corporation GG include the covered employees of
Corporation FF (for a preceding taxable year beginning after
December 31, 2016) and any additional covered employees determined
pursuant to paragraph (c)(2) of this section.
(I) Example 9 (Predecessor of a publicly held corporation that
is party to a merger)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(H) of this section (Example 8), except that,
after the merger, Corporation GG is a privately held corporation for
its 2021 taxable year.
(2) Conclusion. Because Corporation GG is a privately held
corporation for its 2021 taxable year, it is not subject to section
162(m)(1) for this taxable year.
(J) Example 10 (Predecessor of a publicly held corporation that
is party to a merger)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(I) of this section (Example 9), except
Corporation GG becomes a publicly held corporation on June 30, 2023,
and is a publicly held corporation for its 2023 taxable year.
(2) Conclusion. Because Corporation GG became a publicly held
corporation for a taxable year ending prior to April 15, 2025,
Corporation FF is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(G) of this section.
Therefore, any covered employee of Corporation FF for its short
taxable year ending June 30, 2021, is a covered employee of
Corporation GG for its 2023 and subsequent taxable years.
Accordingly, for Corporation GG's 2023 and subsequent taxable years,
the covered employees of Corporation GG include the covered
employees of Corporation FF (for a preceding taxable year beginning
after December 31, 2016) and any additional covered employees
determined pursuant to paragraph (c)(2) of this section.
(K) Example 11 (Predecessor of a publicly held corporation that
is party to a merger)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(J) of this section (Example 10), except that
Corporation FF is a privately held corporation for its taxable year
ending June 30, 2021, but was a publicly held corporation for its
2020 taxable year.
(2) Conclusion. Even though Corporation FF was a privately held
corporation when it merged with Corporation GG on June 30, 2021,
Corporation FF may still be a considered a predecessor corporation
if Corporation GG becomes a publicly held corporation within a
taxable year ending prior to April 15, 2024. Because Corporation GG
became a publicly held corporation for a taxable year ending
December 31, 2023, Corporation FF is a predecessor of a publicly
held corporation within the meaning of paragraph (c)(2)(ii)(G) of
this section. Therefore, any covered employee of Corporation FF for
its 2020 taxable year is a covered employee of Corporation GG for
its 2024 and subsequent taxable years. Accordingly, for Corporation
GG's 2023 and subsequent taxable years, the covered employees of
Corporation GG include the covered employees of Corporation FF (for
a preceding taxable year beginning after December 31, 2016) and any
additional covered employees determined pursuant to paragraph (c)(2)
of this section.
(L) Example 12 (Predecessor of a publicly held corporation that
is party to a merger and subsequently becomes member of an
affiliated group)--(1) Facts. The facts are the same as in paragraph
(c)(2)(vi)(I) of this section (Example 9). Additionally, on June 30,
2022, Corporation GG becomes a member of an affiliated group (as
defined in paragraph (c)(1)(ii) of this section) that files a
consolidated Federal income tax return. Corporation II is the parent
corporation of the group and is a publicly held corporation.
Employee HH was a covered employee of Corporation FF for its taxable
year ending June 30, 2021. On July 1, 2022, Employee HH becomes an
employee of Corporation II.
(2) Conclusion. By becoming a member of an affiliated group (as
defined in paragraph (c)(1)(ii) of this section) on June 30, 2022,
[[Page 70380]]
Corporation GG became a publicly held corporation for a taxable year
ending prior to April 15, 2025. Therefore, Corporation FF is a
predecessor of a publicly held corporation (Corporation GG) within
the meaning of paragraph (c)(2)(ii)(G) of this section. Furthermore,
Corporation FF is a predecessor of a publicly held corporation
(Corporation II) within the meaning of paragraph (c)(2)(ii)(G) of
this section. Accordingly, for Corporation II's 2022 and subsequent
taxable years, Employee HH is a covered employee of Corporation II
because Employee HH was a covered employee of Corporation FF for its
taxable year ending June 30, 2021.
(M) Example 13 Predecessor of a publicly held corporation that
is party to a merger and subsequently becomes member of an
affiliated group)--(1) Facts. The facts are the same as in paragraph
(c)(2)(vi)(L) of this section (Example 12), except that, Corporation
FF was a privately held corporation for its taxable year ending June
30, 2021, and Employee HH was a covered employee of Corporation FF
for its taxable year ending December 31, 2020.
(2) Conclusion. Even though Corporation FF was a privately held
corporation when it merged with Corporation GG on June 30, 2021,
Corporation FF may still be a considered a predecessor corporation
if Corporation GG becomes a publicly held corporation for a taxable
year ending prior to April 15, 2024. Because Corporation GG became a
publicly held corporation for its 2022 taxable year by becoming a
member of an affiliated group (as defined in paragraph (c)(1)(ii) of
this section), Corporation FF is a predecessor of a publicly held
corporation (Corporation GG) within the meaning of paragraph
(c)(2)(ii)(G) of this section. Furthermore, Corporation FF is a
predecessor of a publicly held corporation (Corporation II) within
the meaning of paragraph (c)(2)(ii)(G) of this section. Therefore,
any covered employee of Corporation FF for its 2020 taxable year is
a covered employee of Corporation II for its 2022 and subsequent
taxable years. Accordingly, for Corporation II's 2022 taxable year,
Employee HH is a covered employee of Corporation II because Employee
HH was a covered employee of Corporation FF for its 2020 taxable
year.
(N) Example 14 (Predecessor of a publicly held corporation that
is a party to a merger)--(1) Facts. Corporation JJ is a publicly
held corporation for its 2019 taxable year. Corporation JJ is
incorporated in State KK. On June 1, 2019, Corporation JJ formed a
wholly-owned subsidiary, Corporation LL. Corporation LL is a
publicly held corporation incorporated in State MM. On June 30,
2021, Corporation JJ merged into Corporation LL under State MM law
in a transaction that qualifies as a reorganization under section
368(a)(1)(A), with Corporation LL as the surviving corporation. As a
result of the merger, Corporation JJ has a short taxable year ending
June 30, 2021. Corporation JJ is a publicly held corporation for
this short taxable year.
(2) Conclusion. Corporation JJ is a predecessor of a publicly
held corporation within the meaning of paragraph (c)(2)(ii)(B) of
this section. Therefore, any covered employee of Corporation JJ for
its short taxable year ending June 30, 2021, is a covered employee
of Corporation LL for its taxable years ending after June 30, 2021.
Accordingly, for taxable years ending after June 30, 2021, the
covered employees of Corporation LL include the covered employees of
Corporation JJ (for a preceding taxable year beginning after
December 31, 2016) and any additional covered employees determined
pursuant to paragraph (c)(2) of this section.
(O) Example 15 (Predecessor of a publicly held corporation
becomes member of an affiliated group)--(1) Facts. Corporations NN
and OO are publicly held corporations for their 2021 and 2022
taxable years. On June 30, 2021, Corporation OO acquires for cash
100% of the only class of outstanding stock of Corporation NN. The
group (comprised of Corporations NN and OO) elects to file a
consolidated income tax return. As a result of this election,
Corporation NN has a short taxable year ending on June 30, 2021.
Corporation NN is a publicly held corporation for its taxable year
ending June 30, 2021, and a privately held corporation for
subsequent taxable years. On June 30, 2022, Corporation OO
completely liquidates Corporation NN.
(2) Conclusion. After Corporation OO acquired Corporation NN,
Corporations NN and OO comprised an affiliated group as defined in
paragraph (c)(1)(ii) of this section. Thus, Corporation NN is a
predecessor of a publicly held corporation within the meaning of
paragraph (c)(2)(ii)(D) of this section. Therefore, any covered
employee of Corporation NN for its short taxable year ending June
30, 2021, is a covered employee of Corporation OO for its taxable
years ending after June 30, 2021. Accordingly, for taxable years
ending after June 30, 2021, the covered employees of Corporation OO
include the covered employees of Corporation NN (for a preceding
taxable year beginning after December 31, 2016) and any additional
covered employees determined pursuant to paragraph (c)(2) of this
section.
(P) Example 16 (Predecessor of a publicly held corporation
becomes member of an affiliated group)--(1) Facts. The facts are the
same as in paragraph (c)(2)(vi)(O) of this section (Example 15),
except that Corporation OO is a privately held corporation on June
30, 2021, and for its 2021 and 2022 taxable years.
(2) Conclusion. Because Corporation OO is a privately held
corporation for its 2021 and 2022 taxable years, it is not subject
to section 162(m)(1) for these taxable years.
(Q) Example 17 (Predecessor of a publicly held corporation
becomes member of an affiliated group)--(1) Facts. The facts are the
same as in paragraph (c)(2)(vi)(P) of this section (Example 16),
except that on October 1, 2022, Corporation OO's Securities Act
registration statement in connection with its initial public
offering is declared effective by the SEC, and Corporation OO is a
publicly held corporation for its 2022 taxable year.
(2) Conclusion (Taxable Year Ending December 31, 2021). Because
Corporation OO is a privately held corporation for its 2021 taxable
year, it is not subject to section 162(m)(1) for this taxable year.
(3) Conclusion (Taxable Year Ending December 31, 2022). For the
2022 taxable year, Corporations NN and OO comprised an affiliated
group as defined in paragraph (c)(1)(ii) of this section.
Corporation NN is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(D) and (F) of this
section because Corporation OO became a publicly held corporation
for a taxable year ending prior to April 15, 2025. Therefore, any
covered employee of Corporation NN for its short taxable year ending
June 30, 2021, is a covered employee of Corporation OO for its 2022
and subsequent taxable years. Accordingly, for Corporation OO's 2022
and subsequent taxable years, the covered employees of Corporation
OO include the covered employees of Corporation NN (for a preceding
taxable year beginning after December 31, 2016) and any additional
covered employees determined pursuant to paragraph (c)(2) of this
section.
(R) Example 18 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. Corporations PP and QQ are publicly
held corporations for their 2020 and 2021 taxable years. On June 30,
2021, Corporation PP acquires for cash 80% of the operating assets
(determined by fair market value) of Corporation QQ. Employees RR,
SS, TT, and UU were covered employees for Corporation QQ's taxable
year ending December 31, 2020. On April 1, 2020, Employee RR becomes
an employee of Corporation PP. On June 30, 2021, Employee SS becomes
an employee of Corporation PP. On October 1, 2021, Employee TT
becomes an employee of Corporation PP. On August 1, 2022, Employee
UU becomes an employee of Corporation PP.
(2) Conclusion. Because Corporation PP acquired 80% of
Corporation QQ's operating assets (determined by fair market value),
Corporation QQ is a predecessor of a publicly held corporation
within the meaning of paragraph (c)(2)(ii)(E) of this section.
Therefore, any covered employee of Corporation QQ for its 2020
taxable year (who commenced services for Corporation PP within the
12 months before or the 12 months after the acquisition) is a
covered employee of Corporation PP for its 2021 and subsequent
taxable years. Accordingly, for Corporation PP's 2021 and subsequent
taxable years, the covered employees of Corporation PP include
Employees RR, SS, and TT, and any additional covered employees
determined pursuant to paragraph (c)(2) of this section. Because
Employee UU became an employee of Corporation PP after June 30,
2022, Employee UU is not a covered employee of Corporation PP for
its 2022 taxable year, but may be a covered employee of Corporation
PP by application of paragraph (c)(2) of this section to Employee
UU's employment at Corporation PP.
(S) Example 19 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(R) of this section (Example 18), except that
Corporation PP is a privately held corporation on June 30, 2021 and
for its 2021 taxable year.
(2) Conclusion. Because Corporation PP is a privately held
corporation for its 2021 taxable year, it is not subject to section
162(m)(1) for this taxable year.
[[Page 70381]]
(T) Example 20 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(S) of this section (Example 19), except that,
on October 1, 2022, Corporation PP's Securities Act registration
statement in connection with its initial public offering is declared
effective by the SEC, and Corporation PP is a publicly held
corporation for 2022 taxable year.
(2) Conclusion (2021 taxable year). Because Corporation PP is a
privately held corporation for its 2021 taxable year, it is not
subject to section 162(m)(1) for this taxable year.
(3) Conclusion (2022 taxable year). Corporation QQ is a
predecessor of a publicly held corporation within the meaning of
paragraph (c)(2)(ii)(G) of this section because Corporation PP
became a publicly held corporation for a taxable year ending prior
to April 15, 2025. Therefore, any covered employee of Corporation QQ
for its 2020 taxable year is a covered employee of Corporation PP
for its 2022 and subsequent taxable years. Accordingly, for
Corporation PP's 2022 and subsequent taxable years, the covered
employees of Corporation PP include the covered employees of
Corporation QQ and any additional covered employees determined
pursuant to paragraph (c)(2) of this section.
(U) Example 21 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. Corporations VV, WW, and XX are
publicly held corporations for their 2020 and 2021 taxable years.
Corporations VV and WW are members of an affiliated group.
Corporation WW is a direct subsidiary of Corporation VV. On June 30,
2021, Corporation VV acquires for cash 40% of the operating assets
(determined by fair market value) of Corporation XX. On January 31,
2022, Corporation WW acquires an additional 40% of the operating
assets (determined by fair market value) of Corporation XX.
Employees YY, ZZ, and AAA are covered employees for Corporation XX's
2020 taxable year. Employees BBB and CCC are covered employees for
Corporation XX's 2021 taxable year. On January 15, 2021, Employee
AAA becomes an employee of Corporation WW. On July 1, 2021, Employee
YY becomes an employee of Corporation WW. On February 1, 2022,
Employees ZZ and BBB become employees of Corporation WW. On June 30,
2023, Employee CCC becomes an employee of Corporation WW.
(2) Conclusion. Because an affiliated group, comprised of
Corporations VV and WW, acquired 80% of Corporation XX's operating
assets (determined by fair market value), Corporation XX is a
predecessor of a publicly held corporation within the meaning of
paragraph (c)(2)(ii)(E) of this section. Therefore, any covered
employee of Corporation XX for its 2020 and 2021 taxable years (who
commenced services for Corporation WW within the period beginning 12
months before and ending 12 months after the acquisition), is a
covered employee of Corporation WW for its 2021, 2022 and subsequent
taxable years. Accordingly, for Corporation WW's 2021 and subsequent
taxable years, the covered employees of Corporation WW include
Employees AAA and YY, and any additional covered employees
determined pursuant to paragraph (c)(2) of this section. For
Corporation WW's 2022 and subsequent taxable years, the covered
employees of Corporation WW include Employees AAA, YY, ZZ and BBB,
and any additional covered employees determined pursuant to
paragraph (c)(2) of this section. Because Employee CCC became an
employee of Corporation WW after January 31, 2023, Employee CCC is
not a covered employee of Corporation WW for its 2023 taxable year,
but may be a covered employee of Corporation WW by application of
this paragraph (c)(2) to Employee CCC's employment at Corporation
WW.
(V) Example 22 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(U) of this section (Example 21), except that
Corporations VV and WW are not publicly held corporations on June
30, 2021, and for their 2021 taxable years.
(2) Conclusion. Because Corporations VV and WW are not publicly
held corporations for their 2021 taxable years, they are not subject
to section 162(m)(1) for this taxable year.
(W) Example 23 (Predecessor of a publicly held corporation and
asset acquisition)--(1) Facts. The facts are the same as in
paragraph (c)(2)(vi)(V) of this section (Example 22), except that,
on October 1, 2022, Corporation VV's Securities Act registration
statement in connection with its initial public offering is declared
effective by the SEC, and Corporation VV is a publicly held
corporation for its 2022 taxable year.
(2) Conclusion (2021 taxable year). Because Corporations VV and
WW are not publicly held corporations for their 2021 taxable years,
they are not subject to section 162(m)(1) for this taxable year.
(3) Conclusion (2022 taxable year). Corporation XX is a
predecessor of a publicly held corporation within the meaning of
paragraph (c)(2)(ii)(G) of this section because the affiliated
group, comprised of Corporations VV and WW, became a publicly held
corporation for a taxable year ending prior to April 15, 2024.
Therefore, any covered employee of Corporation XX for its 2020
taxable year is a covered employee of Corporation WW for its 2022
taxable year. Accordingly, for Corporation WW's 2022 and subsequent
taxable years, the covered employees of Corporation WW include the
covered employees of Corporation XX (for a preceding taxable year
beginning after December 31, 2016) and any additional covered
employees determined pursuant to this paragraph (c)(2).
(X) Example 24 (Predecessor of a publicly held corporation and a
division)--(1) Facts. Corporation DDD is a publicly held corporation
for its 2021 and 2022 taxable years. On March 2, 2021, Corporation
DDD forms a wholly-owned subsidiary, Corporation EEE, and transfers
assets to it. On April 1, 2022, Corporation DDD distributes all
shares of Corporation EEE to its shareholders in a transaction
described in section 355(a)(1). On April 1, 2022, Corporation EEE's
Securities Act registration statement in connection with its initial
public offering is declared effective by the SEC. Corporation EEE is
a publicly held corporation for its 2022 taxable year. Employee FFF
serves as the PFO of Corporation DDD from January 1, 2022, to March
31, 2022. On April 2, 2022, Employee FFF joins Corporation EEE to
serve as an advisor (as a common law employee) to the PFO of
Corporation EEE. After March 31, 2022, Employee FFF ceases to
provide services for Corporation EEE.
(2) Conclusion. Because the distribution of the stock of
Corporation EEE is a transaction described under section 355(a)(1),
Corporation DDD is a predecessor of Corporation EEE within the
meaning of paragraph (c)(2)(ii)(C) of this section. Accordingly,
Corporation DDD is a predecessor of Corporation EEE within the
meaning of paragraph (c)(2)(ii)(A) of this section even if
Corporation EEE was a privately held corporation prior to its 2022
taxable year. Because Employee FFF was a covered employee of
Corporation DDD for its 2022 taxable year, Employee FFF is a covered
employee of Corporation EEE for its 2022 taxable year. The result is
the same whether Employee FFF performs services for Corporation EEE
as a common law employee or an independent contractor.
(Y) Example 25 (Predecessor of a publicly held corporation and a
division)--(1) Facts. The facts are the same as in paragraph
(c)(2)(vi)(X) of this section (Example 24), except that, Corporation
DDD exchanges 100% of the shares of Corporation EEE with Corporation
GGG in a transaction described in section 355(a)(1) and Corporation
EEE does not register any class of securities with the SEC.
Furthermore, Employee FFF performs services for Corporation GGG
instead of for Corporation EEE. Corporation GGG is a privately held
corporation for its 2022 taxable year. On October 1, 2023,
Corporation GGG's Securities Act registration statement in
connection with its initial public offering is declared effective by
the SEC. Corporation GGG is a publicly held corporation for its 2023
taxable year. On January 1, 2028, Employee FFF begins serving as a
director of Corporation DDD. Corporation DDD is a publicly held
corporation for its 2028 taxable year.
(2) Conclusion (2022 taxable year). Because Corporation GGG is a
privately held corporation for its 2022 taxable year, section
162(m)(1) does not limit the deduction for compensation deductible
for this taxable year.
(3) Conclusion (2023 taxable year). Because the exchange of the
stock of Corporation EEE is a transaction described under section
355(a)(1), because Corporations EEE and GGG are an affiliated group,
and because Corporation GGG became a publicly held corporation for a
taxable year ending prior to April 15, 2025, Corporation DDD is a
predecessor of Corporation GGG within the meaning of paragraphs
(c)(2)(ii)(D) and (G) of this section. Employee FFF was a covered
employee of Corporation DDD for its 2022 taxable year, and began
performing services for Corporation GGG following April 1, 2021, and
before April 1, 2023. Therefore, Employee FFF is a covered employee
of Corporation GGG for its 2023 taxable year.
(4) Conclusion (2028 taxable year). Because Employee FFF served
as the PFO of
[[Page 70382]]
Corporation DDD from January 1, 2022, to March 31, 2022, Employee
FFF was a covered employee of Corporation DDD for its 2022 taxable
year. Because an individual who is a covered employee for a taxable
year remains a covered employee for all subsequent taxable years
(even after the individual has separated from service), Employee FFF
is a covered employee of Corporation DDD for its 2028 taxable year.
(Z) Example 26 (Predecessor of a publicly held corporation and a
division)--(1) Facts. The facts are the same as in paragraph
(c)(2)(vi)(Y) of this section (Example 25), except that, Employee
FFF begins performing services for Corporation GGG on June 30, 2023,
instead of on April 2, 2022, and never performs services for
Corporation DDD after June 30, 2023. Furthermore, on June 30, 2023,
Employee HHH, a covered employee of Corporation EEE for all of its
taxable years, begins performing services for Corporation GGG as an
independent contractor advising its PEO but not serving as a PEO.
(2) Conclusion (2023 taxable year). Because the exchange of the
stock of Corporation EEE is a transaction described under section
355(a)(1) and because Corporation GGG became a publicly held
corporation for a taxable year ending before April 15, 2025,
Corporation DDD is a predecessor of Corporation GGG within the
meaning of paragraphs (c)(2)(ii)(D) and (G) of this section. Even
though Employee FFF was a covered employee of Corporation DDD for
its 2022 taxable year, because Employee FFF began performing
services for Corporation GGG after April 1, 2023, Employee FFF is
not a covered employee of Corporation GGG for its 2023 taxable year.
However, if Employee FFF is a PEO, PFO, or one of the three highest
compensated executives (other than the PEO or PFO) of Corporation
GGG for its 2023 or subsequent taxable years, then Employee FFF is a
covered employee of Corporation GGG for such taxable year (and
subsequent taxable years). Because Employee HHH was a covered
employee of Corporation EEE for its 2022 taxable year, Employee is a
covered employee of Corporation GGG for its 2023 taxable year.
(AA) Example 27 (Predecessor of a publicly held corporation and
election under section 338(h)(10))--(1) Facts. Corporation III is
the common parent of a group of corporations filing consolidated
returns that includes Corporation JJJ as a member. Corporation III
wholly-owns Corporation JJJ, a publicly held corporation within the
meaning of paragraph (c)(1)(i) of this section. On June 30, 2021,
Corporation LLL purchases Corporation JJJ from Corporation III.
Corporation III and Corporation LLL make a timely election under
section 338(h)(10) with respect to the purchase of Corporation JJJ
stock. For its taxable year after the purchase ending December 31,
2021, Corporation JJJ continues to be a publicly held corporation
within the meaning of paragraph (c)(1)(i) of this section.
(2) Conclusion. As provided in paragraph (c)(2)(ii)(H),
Corporation JJJ is treated as the same corporation for purposes for
purposes of paragraph (c)(2). Accordingly, any covered employee of
Corporation JJJ for its short taxable year ending June 30, 2021, is
a covered employee of Corporation JJJ for its short taxable year
ending on December 31, 2021, and subsequent taxable years.
(BB) Example 28 (Disregarded entity)--(1) Facts. Corporation MMM
is a privately held corporation for its 2020 taxable year. Entity
NNN is a wholly-owned limited liability company and is disregarded
as an entity separate from its owner, Corporation MMM, under Sec.
301.7701-2(c)(2)(i) of this chapter. As of December 31, 2020, Entity
NNN is required to file reports under section 15(d) of the Exchange
Act. For the 2020 taxable year, Employee OOO is the PEO and Employee
PPP is the PFO of Corporation MMM. Employees QQQ, RRR, and SSS are
the three most highly compensated executive officers of Corporation
MMM (other than Employees OOO and PPP). Employee TTT is the PFO of
Entity NNN and does not perform any policy making functions for
Corporation MMM. Entity NNN has no other executive officers.
(2) Conclusion. Because Entity NNN is disregarded as an entity
separate from its owner, Corporation MMM, and is required to file
reports under section 15(d) of the Exchange Act, Corporation MMM is
a publicly held corporation under paragraph (c)(1)(iii) of this
section for its 2020 taxable year. Even though Employee TTT is a PFO
of Entity NNN, Employee TTT is not considered a PFO of Corporation
MMM under paragraph (c)(2)(iii) of this section. As PEO and PFO,
Employees OOO and PPP are covered employees of Corporation MMM under
paragraph (c)(2)(i) of this section. Additionally, as the three most
highly compensated executive officers of Corporation MMM (other than
Employees OOO and PPP), Employees QQQ, RRR, and SSS are also covered
employees of Corporation MMM under paragraph (c)(2)(i) of this
section for Corporation MMM's 2020 taxable year because their
compensation would be disclosed if Corporation MMM were subject to
the SEC executive compensation disclosure rules. The conclusion
would be the same if Entity NNN was not required to file reports
under section 15(d) of the Exchange Act and Corporation MMM was a
publicly held corporation pursuant to paragraph (c)(1)(i) instead of
paragraph (c)(1)(iii) of this section.
(CC) Example 29 (Disregarded entity)--(1) Facts. The facts are
the same as in paragraph (c)(2)(vi)(BB) of this section (Example
28), except that Employee TTT performs a policy making function for
Corporation MMM. If Corporation MMM were subject to the SEC
executive compensation disclosure rules, then Employee TTT would be
treated as an executive officer of Corporation MMM pursuant to 17
CFR 240.3b-7 for purposes of determining the three highest
compensated executive officers for Corporation MMM's 2020 taxable
year. Employees QQQ, RRR and SSS are the three most highly
compensated executive officers of Corporation MMM (other than
Employees OOO and PPP). Employee TTT is compensated more than
Employee QQQ, but less than Employees RRR and SSS.
(2) Conclusion. Because Entity NNN is disregarded as an entity
separate from its owner, Corporation MMM, and is required to file
reports under section 15(d) of the Exchange Act, Corporation MMM is
a publicly held corporation under paragraph (c)(1)(iii) of this
section for its 2020 taxable year. As PEO and PFO, Employees OOO and
PPP are covered employees of Corporation MMM under paragraph
(c)(2)(i) of this section. Employee TTT is one of the three highest
compensated executive officers for Corporation MMM's taxable year.
Because Employees TTT, RRR, and SSS are the three most highly
compensated executive officers of Corporation MMM (other than
Employees OOO and PPP), they are covered employees of Corporation
MMM under paragraph (c)(2)(i) of this section for Corporation MMM's
2020 taxable year because their compensation would be disclosed if
Corporation MMM were subject to the SEC executive compensation
disclosure rules. The conclusion would be the same if Entity NNN was
not required to file reports under section 15(d) of the Exchange Act
and Corporation MMM was a publicly held corporation pursuant to
paragraph (c)(1)(i) instead of paragraph (c)(1)(iii) of this
section.
(DD) Example 30 (Individual as covered employee of a publicly
held corporation that includes the affiliated group)--(1) Facts.
Corporations UUU and VVV are publicly held corporations for their
2020, 2021, and 2022 taxable years. Corporation VVV is a direct
subsidiary of Corporation UUU. Employee WWW is an employee, but not
a covered employee, of Corporation UUU for its 2020, 2021, and 2022
taxable years. From April 1, 2020, to September 30, 2020, Employee
WWW performs services for Corporation VVV. Employee WWW does not
perform any services for Corporation VVV for its 2021 and 2022
taxable years. Employee WWW is a covered employee of Corporation VVV
for its 2020, 2021, and 2022 taxable years. For the 2020 taxable
year, Employee WWW receives compensation for services provided to
Corporations UUU and VVV only from Corporation UUU in the amount of
$1,500,000. Employee WWW receives $2,000,000 from Corporation UUU
for performing services for Corporation UUU during each of its 2021
and 2022 taxable years. On June 30, 2022, Corporation VVV pays
$500,000 to Employee WWW from a nonqualified deferred compensation
plan that complies with section 409A.
(2) Conclusion (2020 taxable year). Because Employee WWW is a
covered employee of Corporation VVV and because the affiliated group
of corporations (composed of Corporations UUU and VVV) is a publicly
held corporation, Employee WWW is a covered employee of the publicly
held corporation that is the affiliated group pursuant to paragraph
(c)(2)(v) of this section. Accordingly, compensation paid by
Corporations UUU and VVV is aggregated for purposes of section
162(m)(1) and, as a result, $500,000 of the aggregate compensation
paid is nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation for its 2020
taxable year.
(3) Conclusion (2021 taxable year). Because Employee WWW is a
covered employee of Corporation VVV pursuant to paragraph
(c)(2)(i)(C) of this section and because the affiliated group of
corporations (composed of Corporations UUU and VVV) is a publicly
[[Page 70383]]
held corporation, Employee WWW is a covered employee of the publicly
held corporation that is the affiliated group pursuant to paragraph
(c)(2)(v) of this section. Accordingly, compensation paid by
Corporations UUU and VVV is aggregated for purposes of section
162(m)(1) and, as a result, $1,000,000 of the aggregate compensation
paid is nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation for its 2021
taxable year.
(4) Conclusion (2022 taxable year). Because Employee WWW is a
covered employee of Corporation VVV pursuant to paragraph
(c)(2)(i)(C) of this section and because the affiliated group of
corporations (composed of Corporations UUU and VVV) is a publicly
held corporation, Employee WWW is a covered employee of the publicly
held corporation that is the affiliated group pursuant to paragraph
(c)(2)(v) of this section. Accordingly, compensation paid by
Corporations UUU and VVV is aggregated for purposes of section
162(m)(1) and, as a result, $1,500,000 of the aggregate compensation
paid is nondeductible. The conclusion would be the same if
Corporation UUU was a privately held corporation for its 2022
taxable year.
(EE) Example 31 (Individual as covered employee of a publicly
held corporation that includes the affiliated group)--(1) Facts.
Corporation BBBB is a publicly held corporation for its 2020 through
2022 taxable years. Corporations YYY and ZZZ are direct subsidiaries
of Corporation BBBB and are privately held corporations for their
2020 through 2022 taxable years. Employee AAAA serves as the PFO of
Corporation BBBB from January 1, 2020 to December 31, 2020, when
Employee AAAA separates from service. On January 1, 2021, Employee
AAAA commences employment with Corporation YYY. In 2021, Employee
AAAA receives compensation from Corporation YYY in excess of
$1,000,000. On April 1, 2022, Employee AAAA commences employment
with Corporation ZZZ. On September 30, 2022, Employee AAAA separates
from service from Corporations YYY and ZZZ. In 2022, Employee AAAA
receives compensation from Corporations YYY and ZZZ in excess of
$1,000,000. For the 2021 and 2022 taxable years, Employee AAA does
not serve as either the PEO or PFO of Corporations YYY and ZZZ, and
is not one of the three highest compensated executive officers
(other than the PEO or PFO) of Corporations YYY and ZZZ.
(2) Conclusion (2021 taxable year). Employee AAAA is a covered
employee of Corporation BBBB for the 2020 taxable year and
subsequent taxable years. Because Employee AAAA is a covered
employee of Corporation BBBB and because the affiliated group of
corporations (composed of Corporations BBBB, YYY, and ZZZ) is a
publicly held corporation, Employee AAAA is a covered employee of
the publicly held corporation that is the affiliated group pursuant
to paragraph (c)(2)(v) of this section for the 2020 taxable year and
subsequent taxable years. Therefore, Corporation YYY's deduction for
compensation paid to Employee AAAA for the 2021 taxable year is
subject to limitation under section 162(m)(1). The result would be
the same if Corporation YYY was a publicly held corporation as
defined in paragraph (c)(1)(i) of this section.
(3) Conclusion (2022 taxable year). Because Employee AAAA is a
covered employee of Corporation BBBB and because the affiliated
group of corporations (composed of Corporations BBBB, YYY, and ZZZ)
is a publicly held corporation, Employee AAAA is a covered employee
of the publicly held corporation that is the affiliated group
pursuant to paragraph (c)(2)(v) of this section. Therefore,
Corporation YYY's and ZZZ's deduction for compensation paid to
Employee AAAA for the 2022 taxable year is subject to limitation
under section 162(m)(1). Because the compensation paid by all
affiliated group members is aggregated for purposes of section
162(m)(1), $1,000,000 of the aggregate compensation paid is
nondeductible. Corporations YYY and ZZZ each are treated as paying a
ratable portion of the nondeductible compensation. The result would
be the same if either Corporation YYY or ZZZ (or both) was a
publicly held corporation as defined in paragraph (c)(1)(i).
(3) Compensation--(i) In general. For purposes of the deduction
limitation described in paragraph (b) of this section, compensation
means the aggregate amount allowable as a deduction under chapter 1 of
the Internal Revenue Code for the taxable year (determined without
regard to section 162(m)(1)) for remuneration for services performed by
a covered employee in any capacity, whether or not the services were
performed during the taxable year. Compensation includes an amount that
is includible in the income of, or paid to, a person other than the
covered employee (including a beneficiary after the death of the
covered employee) for services performed by the covered employee.
(ii) Compensation paid by a partnership. For purposes of paragraph
(c)(3)(i) of this section, compensation includes an amount equal to a
publicly held corporation's distributive share of a partnership's
deduction for compensation expense attributable to the remuneration
paid by the partnership for services performed by a covered employee of
the publicly held corporation.
(iii) Exceptions. Compensation does not include--
(A) Remuneration covered in section 3121(a)(5)(A) through (D)
(concerning remuneration that is not treated as wages for purposes of
the Federal Insurance Contributions Act);
(B) Remuneration consisting of any benefit provided to or on behalf
of an employee if, at the time the benefit is provided, it is
reasonable to believe that the employee will be able to exclude it from
gross income; or
(C) Salary reduction contributions described in section 3121(v)(1).
(iv) Examples. The following examples illustrate the provisions of
this paragraph (c)(3). For each example, assume that the corporation is
a calendar year taxpayer.
(A) Example 1--(1) Facts. Corporation Z is a publicly held
corporation for its 2020 taxable year, during which Employee A
serves as the PEO of Corporation Z and also serves on the board of
directors of Corporation Z. In 2020, Corporation Z paid $1,200,000
to Employee A plus an additional $50,000 fee for serving as chair of
the board of directors of Corporation Z. These amounts are otherwise
deductible for Corporation Z's 2020 taxable year.
(2) Conclusion. The $1,200,000 paid to Employee A in 2020 plus
the additional $50,000 director's fee paid to Employee A in 2020 are
compensation within the meaning of paragraph (c)(3) of this section.
Therefore, Corporation Z's $1,250,000 deduction for the 2020 taxable
year is subject to limitation under section 162(m)(1).
(B) Example 2--(1) Facts. Corporation X is a publicly held
corporation for its 2020 through 2024 taxable years. Employee B
serves as the PEO of Corporation X for its 2020 taxable year. In
2020, Corporation X established a new nonqualified retirement plan
for its executive officers. The retirement plan provides for the
distribution of benefits over a three-year period beginning after a
participant separates from service. Employee B separates from
service in 2021 and becomes a member of the board of directors of
Corporation X in 2022. In 2022, Employee B receives a $75,000 fee
for services as a director and $1,500,000 as the first payment under
the retirement plan. Employee B continues to serve on the board of
directors until 2023 when Employee B dies before receiving the
retirement benefit for 2023 and before becoming entitled to any
director's fees for 2023. In 2023 and 2024, Corporation X pays the
$1,500,000 annual retirement benefits to Person C, a beneficiary of
Employee B.
(2) Conclusion (2022 Taxable Year). In 2022, Corporation X paid
Employee B $1,575,000, including $1,500,000 under the retirement
plan and $75,000 in director's fees. The retirement benefit and the
director's fees are compensation within the meaning of this
paragraph (c)(3). Therefore, Corporation X's $1,575,000 deduction
for the 2022 taxable year is subject to limitation under section
162(m)(1).
(3) Conclusion (2023 and 2024 Taxable Years). In 2023 and 2024,
Corporation X made payments to Person C of $1,500,000 under the
retirement plan. The retirement benefits are compensation within the
meaning of this paragraph (c)(3). Therefore, Corporation X's
deduction for each annual payment of $1,500,000 for the 2023 and
2024 taxable years is subject to limitation under section 162(m)(1).
(D) Example 3--(1) Facts. Corporation T is a publicly held
corporation for its 2021 taxable year. Corporation S is a privately
held corporation for its 2021 taxable year. On January 2, 2021,
Corporations S and T form
[[Page 70384]]
a general partnership. Under the partnership agreement, Corporations
S and T each have a 50% share of the partnership's income, loss, and
deductions. For the taxable year ending December 31, 2021, Employee
D, a covered employee of Corporation T, performs services for the
partnership, and the partnership pays $800,000 to Employee D for
these services, $400,000 of which is allocated to Corporation T.
(2) Conclusion. Because Corporation T's distributive share of
the partnership's $400,000 deduction is attributable to the
compensation paid by the partnership for services performed by
Employee D, a covered employee of Corporation T, the $400,000 is
compensation within the meaning of this paragraph (c)(3) and section
162(m)(1) limits Corporation T's deduction for this expense for the
2021 taxable year. Corporation T's $400,000 share of the
partnership's deduction is aggregated with Corporation T's deduction
for compensation paid to Employee D, if any, in determining the
amount allowable as a deduction to Corporation T for remuneration
paid to Employee D for Corporation T's 2021 taxable year. See Sec.
1.702-1(a)(8)(iii). The result is the same whether the covered
employee performs services for the partnership as a common law
employee, an independent contractor, or a partner, and whether the
payment for services is a payment under section 707(a) or a
guaranteed payment under section 707(c).
(4) Securities Act. The Securities Act means the Securities Act of
1933.
(5) Exchange Act. The Exchange Act means the Securities Exchange
Act of 1934.
(6) SEC. The SEC means the United States Securities and Exchange
Commission.
(7) Foreign Private Issuer. A foreign private issuer means an
issuer as defined in 17 CFR 240.3b-4(c).
(8) American Depositary Receipt (ADR). An American Depositary
Receipt means a negotiable certificate that evidences ownership of a
specified number (or fraction) of a foreign private issuer's securities
held by a depositary (typically, a U.S. bank).
(9) Privately held corporation. A privately held corporation is a
corporation that is not a publicly held corporation as defined in
paragraph (c)(1) of this section (without regard to paragraph
(c)(1)(ii) of this section).
(d) Corporations that become publicly held--(1) In general. In the
case of a corporation that was a privately held corporation and then
becomes a publicly held corporation, the deduction limitation of
paragraph (b) of this section applies to any compensation that is
otherwise deductible for the taxable year ending on or after the date
that the corporation becomes a publicly held corporation. A corporation
is considered to become publicly held on the date that its registration
statement becomes effective either under the Securities Act or the
Exchange Act. The rules in this section apply to a partnership that
becomes a publicly traded partnership that is a publicly held
corporation within the meaning of paragraph (c)(1)(i) of this section.
(2) Example. The following example illustrates the provision of
this paragraph (d).
(i) Facts. In 2021, Corporation E plans to issue debt securities
in a public offering registered under the Securities Act.
Corporation E is not required to file reports under section 15(d) of
the Exchange Act with respect to any other class of securities and
does not have another class of securities required to be registered
under section 12 of the Exchange Act. On December 18, 2021, the
Securities Act registration statement for Corporation Z's debt
securities is declared effective by the SEC.
(ii) Conclusion. Corporation E is considered to become a
publicly held corporation on December 18, 2021 because it is now
required to file reports under section 15(d) of the Exchange Act.
The deduction limitation of paragraph (b) of this section applies to
any remuneration that is otherwise deductible for Corporation E's
taxable year ending on or after December 18, 2021.
(e) Coordination with disallowed excess parachute payments under
section 280G. The $1,000,000 limitation in paragraph (b) of this
section is reduced (but not below zero) by the amount (if any) that
would have been included in the compensation of the covered employee
for the taxable year but for being disallowed by reason of section
280G. For example, assume that during a taxable year a corporation pays
$1,500,000 to a covered employee. Of the $1,500,000, $600,000 is an
excess parachute payment, as defined in section 280G(b)(1), and a
deduction for that excess parachute payment is disallowed by reason of
section 280G(a). Because the $1,000,000 limitation in paragraph (b) of
this section is reduced by the amount of the excess parachute payment,
the corporation may deduct $400,000 ($1,000,000-$600,000), and $500,000
of the otherwise deductible amount is nondeductible by reason of
section 162(m)(1). Thus $1,100,000 (of the total $1,500,000 payment) is
non-deductible, reflecting the disallowance related to the excess
parachute payment under section 280G and the application of section
162(m)(1).
(f) Coordination with excise tax on specified stock compensation.
The $1,000,000 limitation in paragraph (b) of this section is reduced
(but not below zero) by the amount (if any) of any payment (with
respect to such employee) of the tax imposed by section 4985 directly
or indirectly by the expatriated corporation (as defined in section
4985(e)(2)) or by any member of the expanded affiliated group (as
defined in section 4985(e)(4)) that includes such corporation.
(g) Transition rules--(1) Amount of compensation payable under a
written binding contract which was in effect on November 2, 2017--(i)
General rule. This section does not apply to the deduction for
remuneration payable under a written binding contract that was in
effect on November 2, 2017, and that is not modified in any material
respect on or after such date (a grandfathered amount). Instead,
section 162(m), as in effect prior to its amendment by Public Law 115-
97, applies to limit the deduction for such remuneration. Accordingly,
because Sec. 1.162-27 implemented section 162(m), as in effect prior
to its amendment by Public Law 115-97, the rules of Sec. 1.162-27
determine the applicability of the deduction limitation under section
162(m) with respect to the payment of a grandfathered amount.
Remuneration is a grandfathered amount only to the extent that as of
November 2, 2017, the corporation was and remains obligated under
applicable law (for example, state contract law) to pay the
remuneration under the contract if the employee performs services or
satisfies the applicable vesting conditions. Accordingly, this section
applies to the deduction for any amount of remuneration that exceeds
the grandfathered amount if the employee performs services or satisfies
the applicable vesting conditions. If a grandfathered amount and non-
grandfathered amount are otherwise deductible for the same taxable year
and, under the rules of Sec. 1.162-27, the deduction of some or all of
the grandfathered amount may be limited (for example, the grandfathered
amount does not satisfy the requirements of Sec. 1.162-27(e)(2)
through (5) as qualified performance-based compensation), then the
grandfathered amount is aggregated with the non-grandfathered amount to
determine the deduction disallowance for the taxable year under section
162(m)(1) (so that the deduction limit applies to the excess of the
aggregated amount over $1 million). If a portion of the remuneration
payable under a contract is a grandfathered amount and a portion is
subject to this section and payment under the contract is made in a
series of payments, the grandfathered amount is allocated to the first
payment of an amount under the contract that is otherwise deductible.
If the grandfathered amount exceeds the initial payment, the excess is
allocated
[[Page 70385]]
to the next payment of an amount under the contract that is otherwise
deductible, and this process is repeated until the entire grandfathered
amount has been paid.
(ii) Contracts that are terminable or cancelable. If a written
binding contract is renewed after November 2, 2017, this section (and
not Sec. 1.162-27) applies to any payments made after the renewal. A
written binding contract that is terminable or cancelable by the
corporation without the employee's consent after November 2, 2017, is
treated as renewed as of the earliest date that any such termination or
cancellation, if made, would be effective. Thus, for example, if the
terms of a contract provide that it will be automatically renewed or
extended as of a certain date unless either the corporation or the
employee provides notice of termination of the contract at least 30
days before that date, the contract is treated as renewed as of the
date that termination would be effective if that notice were given.
Similarly, for example, if the terms of a contract provide that the
contract will be terminated or canceled as of a certain date unless
either the corporation or the employee elects to renew within 30 days
of that date, the contract is treated as renewed by the corporation as
of that date (unless the contract is renewed before that date, in which
case, it is treated as renewed on that earlier date). Alternatively, if
the corporation will remain legally obligated by the terms of a
contract beyond a certain date at the sole discretion of the employee,
the contract will not be treated as renewed as of that date if the
employee exercises the discretion to keep the corporation bound to the
contract. A contract is not treated as terminable or cancelable if it
can be terminated or canceled only by terminating the employment
relationship of the employee. A contract is not treated as renewed if
upon termination or cancellation of the contract the employment
relationship continues but would no longer be covered by the contract.
However, if the employment continues after such termination or
cancellation, payments with respect to such post-termination or post-
cancellation employment are not made pursuant to the contract (and,
therefore, are not grandfathered amounts).
(iii) Compensation payable under a plan or arrangement. If a
compensation plan or arrangement is binding, the deduction for the
amount that the corporation is obligated to pay pursuant to written
binding contract in effect on November 2, 2017, to an employee pursuant
to the plan or arrangement is not subject to this section even if the
employee was not eligible to participate in the plan or arrangement as
of November 2, 2017, if the employee was employed on November 2, 2017,
by the corporation that maintained the plan or arrangement, or the
employee had the right to participate in the plan or arrangement under
a written binding contract as of that date.
(iv) Compensation subject to recovery by corporation. If the
corporation is obligated or has discretion to recover compensation paid
in a taxable year only upon the future occurrence of a condition that
is objectively outside of the corporation's control, then the
corporation's right to recovery is disregarded for purposes of
determining the grandfathered amount for the taxable year. If the
condition occurs, only the amount the corporation is obligated to pay
under applicable law remains grandfathered taking into account the
occurrence of the condition. Whether or not the corporation exercises
its discretion to recover any compensation does not affect the amount
of compensation that the corporation remains obligated to pay under
applicable law.
(2) Material modifications--(i) If a written binding contract is
modified after November 2, 2017, this section (and not Sec. 1.162-27)
applies to any payments made after the modification. A material
modification occurs when the contract is amended to increase the amount
of compensation payable to the employee. If a written binding contract
is materially modified, it is treated as a new contract entered into as
of the date of the material modification. Thus, amounts received by an
employee under the contract before a material modification are not
affected, but amounts received subsequent to the material modification
are treated as paid pursuant to a new contract, rather than as paid
pursuant to a written binding contract in effect on November 2, 2017.
(ii) A modification of the contract that accelerates the payment of
compensation is a material modification unless the amount of
compensation paid is discounted to reasonably reflect the time value of
money. If the contract is modified to defer the payment of
compensation, any compensation paid or to be paid that is in excess of
the amount that was originally payable to the employee under the
contract will not be treated as resulting in a material modification if
the additional amount is based on applying to the amount originally
payable either a reasonable rate of interest or the rate of return on a
predetermined actual investment as defined in Sec. 31.3121(v)(2)-
1(d)(2)(i)(B) of this chapter, (whether or not assets associated with
the amount originally owed are actually invested therein) such that the
amount payable by the employer at the later date will be based on the
reasonable rate of interest or the actual rate of return on the
predetermined actual investment (including any decrease, as well as any
increase, in the value of the investment).
(iii) The adoption of a supplemental contract or agreement that
provides for increased compensation, or the payment of additional
compensation, is a material modification of a written binding contract
if the facts and circumstances demonstrate that the additional
compensation to be paid is based on substantially the same elements or
conditions as the compensation that is otherwise paid pursuant to the
written binding contract. However, a material modification of a written
binding contract does not include a supplemental payment that is equal
to or less than a reasonable cost-of-living increase over the payment
made in the preceding year under that written binding contract. In
addition, the failure, in whole or in part, to exercise negative
discretion under a contract does not result in the material
modification of that contract.
(iv) If a grandfathered amount is subject to a substantial risk of
forfeiture (as defined in Sec. 1.409A-1(d)), then a modification of
the contract that results in a lapse of the substantial risk of
forfeiture is not considered a material modification. For compensation
received pursuant to the substantial vesting of restricted property, or
the exercise of a stock option or stock appreciation right that do not
provide for a deferral of compensation (as defined in Sec. 1.409A-
1(b)(5)(i) and (ii)), a modification of a written binding contract in
effect on November 2, 2017, that results in a lapse of the substantial
risk of forfeiture (as defined Sec. 1.83-3(c)) is not considered a
material modification.
(3) Examples. The following examples illustrate the provisions of
this paragraph (g). For each example, assume for all relevant years
that the corporation is a publicly held corporation within the meaning
of paragraph (c)(1) of this section and is a calendar year taxpayer.
Furthermore, assume that, for each example, if any arrangement is
subject to section 409A, then the arrangement complies with section
409A, and that no arrangement is subject to section 457A.
(i) Example 1 (Multi-year agreement for annual salary)--(A)
Facts. On October 2,
[[Page 70386]]
2017, Corporation X executed a 3-year employment agreement with
Employee A for an annual salary of $2,000,000 beginning on January
1, 2018. Employee A serves as the PFO of Corporation X for the 2017
through 2020 taxable years. The agreement provides for automatic
extensions after the 3-year term for additional 1-year periods,
unless the corporation exercises its option to terminate the
agreement within 30 days before the end of the 3-year term or,
thereafter, within 30 days before each anniversary date. Termination
of the employment agreement does not require the termination of
Employee A's employment with Corporation X. Under applicable law,
the agreement for annual salary constitutes a written binding
contract in effect on November 2, 2017, to pay $2,000,000 of annual
salary to Employee A for three years through December 31, 2020.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee A is a
covered employee for Corporation X's 2018 through 2020 taxable
years. Because the October 2, 2017, employment agreement is a
written binding contract to pay Employee A an annual salary of
$2,000,000, this section does not apply (and Sec. 1.162-27 does
apply) to the deduction for Employee A's annual salary. Pursuant to
Sec. 1.162-27(c)(2), Employee A is not a covered employee for
Corporation X's 2018 through 2020 taxable years. Accordingly, the
deduction for Employee A's annual salary for the 2018 through 2020
taxable years is not subject to section 162(m)(1). However, the
employment agreement is treated as renewed on January 1, 2021,
unless it is previously terminated, and the deduction limit of this
section (and not Sec. 1.162-27) will apply to the deduction for any
payments made under the employment agreement on or after that date.
(ii) Example 2 (Agreement for severance based on annual salary
and discretionary bonus)--(A) Facts. The facts are the same as in
paragraph (g)(3)(i) of this section (Example 1), except that the
employment agreement also requires Corporation X to pay Employee A
severance if Corporation X terminates the employment relationship
without cause within the term of the agreement. The amount of
severance is equal to the sum of two times Employee A's annual
salary plus two times Employee A's discretionary bonus (if any) paid
within 12 months preceding termination. Under applicable law, the
agreement for severance constitutes a written binding contract in
effect on November 2, 2017, to pay $4,000,000 (two times Employee
A's $2,000,000 annual salary) if Corporation X terminates Employee
A's employment without cause within the term of the agreement.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee A is a
covered employee for Corporation X's 2018 through 2020 taxable
years. Because the October 2, 2017, employment agreement is a
written binding contract to pay Employee A $4,000,000 if Employee A
is terminated without cause prior to December 31, 2020, this section
does not apply (and Sec. 1.162-27 does apply) to the deduction for
$4,000,000 of Employee A's severance. Pursuant to Sec. 1.162-
27(c)(2), Employee A is not a covered employee for Corporation X's
2018 through 2020 taxable years. Accordingly, the deduction for
$4,000,000 of Employee A's severance is not subject to section
162(m)(1). However, the employment agreement is treated as renewed
on January 1, 2021, unless it is previously terminated, and this
section (and not Sec. 1.162-27) will apply to the deduction for any
payments made under the employment agreement, including for
severance, on or after that date.
(iii) Example 3 (Agreement for severance based on annual salary
and discretionary bonus)--(A) Facts. The facts are the same as in
paragraph (g)(3)(ii) of this section (Example 2), except that, on
October 31, 2017, Corporation X paid Employee A a discretionary
bonus of $10,000. Under applicable law, the agreement for severance
constitutes a written binding contract in effect on November 2,
2017, to pay $4,000,000 (two times Employee A's $2,000,000 annual
salary) if Corporation X terminates Employee A's employment without
cause prior to December 31, 2020, and $20,000 if Corporation X
terminates Employee A's employment without cause prior to October
31, 2018. On June 30, 2018, Corporation X terminates Employee A
without cause and makes a $4,020,000 severance payment to Employee
A.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee A is a
covered employee for Corporation X's 2018 taxable year. Because the
October 2, 2017, agreement is a written binding contract to pay
Employee A $4,000,000 if Employee A is terminated without cause
prior to December 31, 2020, and $20,000 if Corporation X terminates
Employee A's employment without cause prior to October 31, 2018,
this section does not apply (and Sec. 1.162-27 does apply) to the
deduction for Employee A's severance payment of $4,020,000. Pursuant
to Sec. 1.162-27(c)(2), Employee A is not a covered employee for
Corporation X's 2018 taxable year. Accordingly, the deduction for
the entire $4,020,000 of Employee A's severance payment is not
subject to section 162(m)(1).
(iv) Example 4 (Effect of discretionary bonus payment on
agreement for severance based on annual salary and discretionary
bonus)--(A) Facts. The facts are the same as in paragraph (g)(3)(ii)
of this section (Example 2), except that, on May 14, 2018,
Corporation X paid a $600,000 discretionary bonus to Employee A and,
on April 30, 2019, terminated Employee A's employment without cause.
Pursuant to the terms of the employment agreement for severance, on
May 1, 2019, Corporation X made a $5,200,000 severance payment (the
sum of two times the $2,000,000 annual salary and two times the
$600,000 discretionary bonus) to Employee A.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee A is a
covered employee for Corporation X's 2019 taxable year. Because the
October 2, 2017, agreement is a written binding contract to pay
Employee A $4,000,000 if Employee A is terminated without cause
prior to December 31, 2020, this section does not apply (and Sec.
1.162-27 does apply) to the deduction for $4,000,000 of Employee A's
severance payment. Accordingly, the deduction for $4,000,000 of
Employee A's severance payment is not subject to section 162(m)(1).
Because the October 2, 2017, agreement is not a written binding
contract to pay Employee A a discretionary bonus, the deduction for
$1,200,000 (based on the discretionary bonus) of the $5,200,000
payment is subject to this section (and not Sec. 1.162-27).
(v) Example 5 (Effect of adjustment to annual salary on
severance)--(A) Facts. The facts are the same as in paragraph
(g)(3)(ii) of this section (Example 2), except that the employment
agreement provides for discretionary increases in salary and, on
January 1, 2019, Corporation X increased Employee A's annual salary
from $2,000,000 to $2,050,000, an increase that was less than a
reasonable, cost-of-living adjustment.
(B) Conclusion (Annual salary): If this Sec. 1.162-33 applies,
Employee A is a covered employee for Corporation X's 2018 through
2020 taxable years. Because the October 2, 2017, agreement is a
written binding contract to pay Employee A an annual salary of
$2,000,000, this section does not apply (and Sec. 1.162-27 does
apply) to the deduction for Employee A's annual salary unless the
change in the salary is a material modification. Even though the
$50,000 increase is paid on the basis of substantially the same
elements or conditions as the salary that is otherwise paid under
the contract, the $50,000 increase does not constitute a material
modification because it is less than or equal to a reasonable cost-
of-living increase to the $2,000,000 annual salary Corporation X is
required to pay under applicable law as of November 2, 2017.
However, the deduction for the $50,000 increase is subject to this
section (and not Sec. 1.162-27).
(C) Conclusion (Severance payment): Because the October 2, 2017,
agreement is a written binding contract to pay Employee A severance
of $4,000,000, this section would not apply (and Sec. 1.162-27
would apply) to the deduction for this amount of severance unless
the change in the employment agreement is a material modification.
Even though the $100,000 increase in severance (two times the
$50,000 increase in salary) would be paid on the basis of
substantially the same elements or conditions as the severance that
would otherwise be paid pursuant to the written binding contract,
the $50,000 increase in salary on which it is based does not
constitute a material modification of the written binding contract
since it is less than or equal to a reasonable cost-of-living
increase. However, the deduction for the $100,000 increase in
severance is subject to this section (and not Sec. 1.162-27).
(vi) Example 6 (Effect of adjustment to annual salary on
severance)--(A) Facts. The facts are the same as in paragraph
(g)(3)(v) of this section (Example 5), except that, on January 1,
2019, Corporation X increased Employee A's annual salary from
$2,000,000 to $3,000,000, an increase that exceeds a reasonable,
cost-of-living adjustment.
(B) Conclusion (Annual salary): If this Sec. 1.162-33 applies,
Employee A is a covered employee for Corporation X's 2018 through
2020 taxable years. Because the October 2, 2017, agreement is a
written binding contract to pay Employee A an annual salary of
$2,000,000, this section does not apply (and
[[Page 70387]]
Sec. 1.162-27 does apply) to the deduction for Employee A's annual
salary unless the change in the employment agreement is a material
modification. The $1,000,000 increase is a material modification of
the written binding contract because the additional compensation is
paid on the basis of substantially the same elements or conditions
as the compensation that is otherwise paid pursuant to the written
binding contract, and it exceeds a reasonable, annual cost-of-living
increase from the $2,000,000 annual salary for 2018 that Corporation
X is required to pay under applicable law as of November 2, 2017.
Because the written binding contract is materially modified as of
January 1, 2019, the deduction for all annual salary paid to
Employee A in 2019 and thereafter is subject to this section (and
not Sec. 1.162-27).
(C) Conclusion (Severance payment): Because the October 2, 2017,
agreement is a written binding contract to pay Employee A severance
of $4,000,000, this section would not apply (and Sec. 1.162-27
would apply) to the deduction for this amount of severance unless
the change in the employment agreement is a material modification.
The additional $2,000,000 (two times the $1,000,000 increase in
annual salary) constitutes a material modification of the written
binding contract because the $1,000,000 increase in salary on which
it is based constitutes a material modification of the written
binding contract since it exceeds a reasonable cost-of-living
increase from the $2,000,000 annual salary for 2018 that Corporation
X is required to pay under applicable law as of November 2, 2017.
Because the agreement is materially modified as of January 1, 2019,
the deduction for any amount of severance payable to Employee A
under the severance agreement is subject to this section (and not
Sec. 1.162-27).
(vii) Example 7 (Elective deferral of an amount that corporation
was obligated to pay under applicable law)--(A) Facts. The facts are
the same as in paragraph (g)(3)(i) of this section (Example 1),
except that, on December 15, 2018, Employee A makes a deferral
election under a NQDC plan to defer $200,000 of annual salary earned
and payable in 2019. Pursuant to the deferred compensation
agreement, the $200,000, including earnings, is to be paid in a lump
sum at Employee A's separation from service. The earnings are based
on the Standard & Poor's 500 Index. Under applicable law, pursuant
to the written binding contract in effect on November 2, 2017, (and
absent the deferral agreement) Corporation X would have been
obligated to pay $200,000 to Employee A in 2019, but is not
obligated to pay any earnings on the $200,000 deferred pursuant to
the deferral election Employee A makes on December 15, 2018.
Employee A separates from service on December 15, 2020. On December
15, 2020, Corporation X pays $250,000 (the deferred $200,000 of
salary plus $50,000 in earnings).
(B) Conclusion. If this Sec. 1.162-33 applies, Employee A is a
covered employee for Corporation X's 2020 taxable year. Employee A's
deferred compensation agreement is not a material modification of
the written binding contract in effect on November 2, 2017, because
the earnings to be paid under the deferred compensation agreement
are based on a predetermined actual investment (as defined in Sec.
31.3121(v)(2)-1(d)(2)(i)(B)). The deduction for the $50,000 of
earnings to be paid that exceed the amount originally payable to
Employee A under the written binding contract ($200,000 of salary)
are subject to this section (and not Sec. 1.162-27). This section
does not apply (and Sec. 1.162-27 does apply) to the deduction for
the $200,000 portion of the $250,000 payment because Corporation X
was obligated under applicable law to pay as of November 2, 2017.
Pursuant to Sec. 1.162-27(c)(2), Employee A is not a covered
employee for Corporation X's 2020 taxable year; thus, the deduction
for the $200,000 payment is not subject to section 162(m)(1).
(viii) Example 8 (Compensation subject to mandatory recovery by
corporation)--(A) Facts. Employee B serves as the PFO of Corporation
Z for its 2017 through 2019 taxable years. On October 2, 2017,
Corporation Z executed a bonus agreement with Employee B that
provides for a performance bonus of $3,000,000 to be paid on May 1,
2019, if Corporation Z's net earnings increase by at least 10% for
its 2018 taxable year based on the financial statements filed with
the SEC. The agreement prohibits Corporation Z from reducing the
amount of the bonus for any reason but provides that, if the bonus
is paid and subsequently the financial statements are restated to
show that the net earnings did not increase by at least 10%, then
Corporation Z shall recover the $3,000,000 from Employee B within
six months of the restatement. Under applicable law, the agreement
for the performance bonus constitutes a written binding contract in
effect on November 2, 2017, to pay $3,000,000 to Employee B if
Corporation Z's net earnings increase by at least 10% for its 2018
taxable year based on the financial statements filed with the SEC.
On May 1, 2019, Corporation Z pays $3,000,000 to Employee B because
its net earnings increased by at least 10% of its 2018 taxable year.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee B is a
covered employee for Corporation Z's 2019 taxable year. The terms of
the contract providing for recovery of the $3,000,000 do not
preclude Corporation Z from being contractually obligated under
applicable law to pay $3,000,000 to Employee B if the net earnings
increase by at least 10% for its 2018 taxable year. Because the
October 2, 2017, agreement is a written binding contract to pay
Employee B $3,000,000 if Corporation Z's net earnings increase by at
least 10% for its 2018 taxable year based on the financial
statements filed with the SEC, this section does not apply (and
Sec. 1.162-27 does apply) to the deduction for the $3,000,000
payment. Pursuant to Sec. 1.162-27(c)(2), Employee B is not a
covered employee for Corporation Z's 2019 taxable year, so the
deduction for the $3,000,000 payment is not subject to section
162(m)(1).
(ix) Example 9 (Compensation subject to discretionary recovery
by corporation)--(A) Facts. The facts are the same as in paragraph
(g)(3)(viii) of this section (Example 8), except that the agreement
provides that, if the financial statements are restated to show that
the net earnings did not increase by at least 10%, then Corporation
Z may, in its discretion, recover all or a portion of the $3,000,000
bonus from Employee B within six months of the restatement. Under
applicable law, the agreement constitutes a written binding contract
in effect on November 2, 2017, to pay $3,000,000 to Employee B if
the conditions are met. However, under applicable law, taking into
account the employer's ability to exercise discretion and the
employer's past exercise of such discretion with respect to a
recovery in the event of an earnings restatement, on November 2,
2017, the bonus plan is a written binding contract only with respect
to $500,000 if Corporation Z's financial statements are restated to
show that the net earnings did not increase by at least 10%. On May
1, 2019, Corporation Z pays $3,000,000 to Employee B. On July 1,
2019, Corporation Z's financial statements are restated to show that
its net earnings did not increase by at least 10% for its 2018
taxable year. On July 30, 2019, Corporation Z recovers $1,000,000
from Employee B.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee B is a
covered employee for Corporation Z's 2019 taxable year. Because the
October 2, 2107, agreement is a written binding contract to pay
Employee B $3,000,000 if the applicable conditions are met, this
section does not apply (and Sec. 1.162-27 does apply) to the
deduction for the $3,000,000 provided Corporation Z's financial
statements are not restated to show that its net earnings did not
increase by at least 10%. However, because Corporation Z's financial
statements were so restated, then, on November 2, 2017, under
applicable law, taking into account the employer's ability to
exercise discretion and the employer's past exercise of such
discretion, the bonus plan constitutes a written binding contract to
pay only $500,000. Because Corporation Z recovered $1,000,000 of the
$3,000,000 payment, this section does not apply (and Sec. 1.162-27
does apply) to the deduction for $500,000 of the $2,000,000 that
Corporation Z did not recover. Pursuant to Sec. 1.162-27(c)(2),
Employee B is not a covered employee for Corporation Z's 2019
taxable year, so the deduction for the $500,000 is not subject to
section 162(m)(1). The deduction for the remaining $1,500,000 is
subject to this section (and not Sec. 1.162-27).
(x) Example 10 (Compensation subject to discretionary recovery
by corporation based on a condition)--(A) Facts. The facts are the
same as in paragraph (g)(3)(viii) of this section (Example 8),
except that the agreement does not include a provision regarding an
earnings restatement. Instead, the agreement provides that
Corporation Z may, in its discretion, require Employee B to repay
the $3,000,000 bonus if, within three years from the date of
payment, Employee B engages in willful or reckless behavior that has
a material adverse impact on Corporation Z, or is convicted of, or
pleads nolo contendre or guilty to a felony. Under applicable law,
the agreement constitutes a written binding contract in effect on
November 2, 2017, to pay $3,000,000 to Employee B if the conditions
are met.
[[Page 70388]]
However, under applicable law, taking into account the employer's
ability to exercise discretion and the employer's past exercise of
such discretion, if conditions arise to permit Corporation Z to
recover the $3,000,000 bonus from Employee B, then the bonus plan
established on October 2, 2017, constitutes a written binding
contract to pay only $2,000,000 to Employee B if Corporation Z's net
earnings increase by at least 10% for its 2018 taxable year based on
the financial statements filed with the SEC. On May 1, 2019,
Corporation Z pays $3,000,000 to Employee B. Prior to May 1, 2022,
Employee B does not engage in willful or reckless behavior that has
a material adverse impact on Corporation Z, and is not convicted of,
or plead nolo contendre or guilty to a felony.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee B is a
covered employee for Corporation Z's 2019 taxable year. Because the
October 2, 2017, agreement is a written binding contract under
applicable law to pay Employee B $3,000,000 if the applicable
conditions are met, this section does not apply (and Sec. 1.162-27
does apply) to the deduction for the $3,000,000. Pursuant to Sec.
1.162-27(c)(2), Employee B is not a covered employee for Corporation
Z's 2019 taxable year, so the deduction for the $3,000,000 is not
subject to section 162(m)(1).
(xi) Example 11 (Compensation subject to discretionary recovery
by corporation based on a condition)--(A) Facts. The facts are the
same as in paragraph (g)(3)(x) of this section (Example 10), except
that, on April 1, 2021, Employee B pleads guilty to a felony.
Because Employee B pled guilty to a felony prior to May 1, 2022,
Corporation Z has discretion to recover the $3,000,000 bonus from
Employee B. Corporation Z chooses not to recover any amount of the
$3,000,000 from Employee B.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee B is a
covered employee for Corporation Z's 2019 taxable year. Because
Employee B pled guilty to a felony prior to May 1, 2022, the bonus
plan constitutes a written binding contract in effect on November 2,
2017, to pay only $2,000,000 to Employee B if the applicable
conditions were met. Accordingly, this section does not apply (and
Sec. 1.162-27 does apply) to the deduction for the $2,000,000
portion of the $3,000,000. Pursuant to Sec. 1.162-27(c)(2),
Employee B is not a covered employee for Corporation Z's 2019
taxable year; thus, the deduction for the $2,000,000 portion of the
$3,000,000 is not subject to section 162(m)(1). The deduction for
the remaining $1,000,000 of the $3,000,000 is subject to this
section (and not Sec. 1.162-27).
(xii) Example 12 (Election to defer bonus)--(A) Facts. On
December 31, 2015, Employee C, an employee of Corporation Y, makes
an election under a NQDC plan to defer the entire amount that would
otherwise be paid to Employee C on December 31, 2016, under
Corporation Y's 2016 annual bonus plan. Pursuant to the NQDC plan,
the earnings on the deferred amount may be based on either of the
following two investment choices (but not the greater of the two):
Annual total shareholder return for Corporation Y or Moody's Average
Corporate Bond Yield. On a prospective basis, Employee C may change
the investment measure. The deferred amount and the earnings thereon
are to be paid in a lump sum at Employee C's separation from
service. Employee C initially elects to have earnings based on
annual total shareholder return for Corporation Y. On December 31,
2018, Employee C elects to have earnings based on Moody's Average
Corporate Bond Yield. The bonus plan provides that Corporation Y may
not reduce the bonus or any applicable earnings. Employee C earns a
$200,000 bonus for the 2016 taxable year. Under applicable law, the
deferred compensation agreement constitutes a written binding
contract in effect on November 2, 2017, to pay the $200,000 bonus
plus earnings. Specifically, Corporation Y is obligated to pay
earnings on the $200,000 deferred pursuant to the deferral election
Employee C makes on December 31, 2015. On January 1, 2018, Employee
C is promoted to serve as PEO of Corporation Y and becomes a covered
employee for the first time. On December 15, 2020, Employee C
separates from service and Corporation Y pays $225,000 (the deferred
$200,000 bonus plus $25,000 in earnings) to Employee C.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee C is a
covered employee for Corporation Y's 2020 taxable year because
Employee C served as the PEO of Corporation Y during the taxable
year. The December 31, 2015, agreement is a written binding contract
to pay the $200,000 bonus plus earnings. Furthermore, Employee C's
December 31, 2018, election to change the earnings measure does not
constitute a material modification. Accordingly, this section does
not apply (and Sec. 1.162-27 does apply) to the deduction for the
$225,000 payment from Corporation Y to Employee C. Pursuant to Sec.
1.162-27(c)(2), Employee C is not a covered employee because
Employee C did not serve as the PEO at the close of the Corporation
Y's taxable year, so the deduction for the $225,000 payment is not
subject to section 162(m)(1).
(xiii) Example 13 (Nonaccount balance plan)--(A) Facts. On
November 2, 2012, Employee D commences employment with Corporation W
as its PFO. Employee D separates from service as PFO on January 7,
2020. For each taxable year, Employee D receives a base salary of
$2,000,000. On January 1, 2016, Corporation W and Employee D enter
into a NQDC arrangement that is a nonaccount balance plan (as
defined in Sec. 1.409A-1(c)(2)(i)(C). Under the terms of the plan,
Corporation W will pay Employee D a lump sum payment equal to 25% of
Employee D's base salary in the year of separation from service
multiplied by 1/12 for each month of service. The plan provides that
this payment will be made six months after separation from service
and that Corporation W may, at any time, amend the plan to reduce
the amount of future benefits; however, Corporation W may not reduce
the benefit accrued prior to the date of the amendment. Furthermore,
under the terms of the plan and in accordance with Sec. 1.409A-
3(j)(4)(ix)(C)(3), if Corporation W terminates the plan, the
payments due under the plan may be accelerated to any date no
earlier than 12 months after the date of termination and no later
than 24 months after the date of termination. Under applicable law,
if an employer terminates a NQDC plan and does not make a payment
until 12 months after the date of termination, then, to reflect the
time value of money, the employer is obligated to pay a reasonable
rate of interest (compounded annually) on any benefit accrued under
the plan at the date of termination until the date of payment.
Assume for this purpose that for all applicable periods 3% is a
reasonable rate of interest. As of November 2, 2017, Employee D has
60 months of service for Corporation W as calculated under the NQDC
plan terms. Under applicable law, the plan constitutes a written
binding contract in effect on November 2, 2017, to pay $2,575,000.
The $2,575,000 is equal to the amount Corporation W is obligated to
pay if it terminated the plan on November 2, 2017 (25% x $2,000,000
x 1/12 x 60 months of service ($2,500,000), plus a 3% reasonable
rate of interest that the $2,500,000 earns after plan termination
($75,000)). On January 7, 2020, when Employee D separates from
service, Corporation D pays $3,583,333.33 (25% x $2,000,000 x 1/12 x
86 months of service).
(B) Conclusion. If this Sec. 1.162-33 applies, Employee D is a
covered employee for Corporation W's 2020 taxable year. Because, as
of November 2, 2017, the plan is a written binding contract with
respect to $2,575,000, this section does not apply (and Sec. 1.162-
27 does apply) to the deduction for the $2,575,000 portion of the
$3,583,333.33 payment. Pursuant to Sec. 1.162-27(c)(2), Employee D
is not a covered employee, so the deduction for the $2,575,000
portion of the $3,583,333.33 payment is not subject to section
162(m)(1). The deduction for the remaining $1,008,333.33 portion of
the $3,583,333.33 payment is subject to this section (and not Sec.
1.162-27).
(xiv) Example 14 (Nonaccount balance plan with offset)--(A)
Facts. The facts are the same as in paragraph (g)(3)(xiii) of this
section (Example 13), except that the plan provides that the amount
to be paid to an employee is decreased by the employee's account
balance in Corporation W's 401(k) plan on the date of separation
from service. The terms of the offset comply with section 409A. On
November 2, 2017, and July 7, 2020, Employee D's account balance in
the 401(k) plan is $500,000 and $600,000, respectively. Under
applicable law, the NQDC plan constitutes a written binding contract
in effect on November 2, 2017, to pay $2,075,000, which is equal to
the amount of remuneration Corporation W is obligated to pay if it
terminated the NQDC plan on November 2, 2017. The $2,075,000 is the
difference between the $500,000 401(k) plan account balance on
November 2, 2017, and the $2,500,000 accumulated benefit (25% x
$2,000,000 x 1/12 x 60 months of service), plus the 3% interest that
the $2,500,000 earns after plan termination ($75,000). On July 7,
2020, under the terms of the NQDC plan, Corporation D pays
$2,983,333.33 (the difference between the $600,000 401(k) account
balance on July 7, 2020, and $3,583,333.33 (25% x $2,000,000 x 1/12
x 86 months of service)).
[[Page 70389]]
(B) Conclusion. If this Sec. 1.162-33 applies, Employee D is a
covered employee for Corporation W's 2020 taxable year. Because, as
of November 2, 2017, the plan is a written binding contract with
respect to $2,075,000, this section does not apply (and Sec. 1.162-
27 does apply) to the deduction for $2,075,000 of the $2,983,333.33
payment. Pursuant to Sec. 1.162-27(c)(2), Employee D is not a
covered employee, so the deduction for the $2,075,000 portion of the
$2,983,333.33 payment is not subject to section 162(m)(1). The
deduction for the remaining $908,333.33 portion of the $2,983,333.33
payment is subject to this section (and not Sec. 1.162-27).
(xv) Example 15 (Nonaccount balance plan)--(A) Facts. The facts
are the same as in paragraph (g)(3)(xiii) of this section (Example
13), except that the nonaccount balance plan provides that
Corporation W will pay Employee D a lump sum payment of $5,000,000
on November 7, 2020, if Employee D provides services from January 1,
2016, through June 30, 2017. Under applicable law, the plan
constitutes a written binding contract in effect on November 2,
2017, to pay $4,712,979.55, which is the sum of $4,575,708.30 (the
amount of remuneration Corporation W is obligated to pay if it
reduced the amount of future benefits to $0 on November 2, 2017) and
the increase in present value of $137,271.55 (the difference between
$4,575,708.30 and $4,712,979.55 (the present value of $5,000,000 on
November 2, 2018)). On November 7, 2020, Corporation W makes a lump
sum payment of $5,000,000 to Employee D.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee D is a
covered employee for Corporation W's 2020 taxable year. Because, as
of November 2, 2017, the plan is a written binding contract with
respect to $4,712,979.55, this section does not apply (and Sec.
1.162-27 does apply) to the deduction for the $4,712,979.55 portion
of the $5,000,000 payment. Pursuant to Sec. 1.162-27(c)(2),
Employee D is not a covered employee, so the deduction for the
$4,712,979.55 portion of the $5,000,000 payment is not subject to
section 162(m)(1). The deduction for the remaining $287,020.45
portion of the $5,000,000 payment is subject to this section (and
not Sec. 1.162-27).
(xvi) Example 16 (Performance bonus plan with negative
discretion)--(A) Facts. Employee E serves as the PEO of Corporation
V for the 2017 and 2018 taxable years. On February 1, 2017,
Corporation V establishes a bonus plan, under which Employee E will
receive a cash bonus of $1,500,000 if a specified performance goal
is satisfied. The compensation committee retains the right, if the
performance goal is met, to reduce the bonus payment to no less than
$400,000 if, in its judgment, other subjective factors warrant a
reduction. On November 2, 2017, under applicable law which takes
into account the employer's ability to exercise negative discretion,
the bonus plan established on February 1, 2017, constitutes a
written binding contract to pay $400,000. On March 1, 2018, the
compensation committee certifies that the performance goal was
satisfied, but exercises its discretion to reduce the award to
$500,000. On April 1, 2018, Corporation V pays $500,000 to Employee
E. The payment satisfies the requirements of Sec. 1.162-27(e)(2)
through (5) as qualified performance-based compensation.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee E is a
covered employee for Corporation V's 2018 taxable year. Because the
February 1, 2017, plan is a written binding contract to pay Employee
E $400,000 if the performance goal is satisfied, this section does
not apply (and Sec. 1.162-27 does apply) to the deduction for the
$400,000 portion of the $500,000 payment. Furthermore, the failure
of the compensation committee to exercise its discretion to reduce
the award further to $400,000, instead of $500,000, does not result
in a material modification of the contract. Pursuant to Sec. 1.162-
27(e)(1), the deduction for the $400,000 payment is not subject to
section 162(m)(1) because the payment satisfies the requirements of
Sec. 1.162-27(e)(2) through (5) as qualified performance-based
compensation. The deduction for the remaining $100,000 of the
$500,000 payment is subject to this section (and not Sec. 1.162-27)
and therefore the status as qualified performance-based compensation
is irrelevant to the application of section 162(m)(1) to this
remaining portion.
(xvii) Example 17 (Account balance plan)--(A) Facts. Employee F
serves as the PFO of Corporation U for the 2016 through 2018 taxable
years. On January 4, 2016, Corporation U and Employee F enter into a
NQDC arrangement that is an account balance plan. Under the terms of
the plan, Corporation A will pay Employee X's account balance on
June 30, 2019, but only if Employee F continues to serve as the PFO
through December 31, 2018. Pursuant to the terms of the plan,
Corporation U credits $100,000 to Employee F's account annually on
December 31 of each year for three years beginning on December 31,
2016, and credits earnings and losses on the account balance daily.
The plan also provides that Corporation U may, in its discretion and
at any time, amend the plan either to stop or to reduce the amount
of future credits; however, Corporation U may not reduce Employee
F's account balance credited before the date of any such amendment.
Under the terms of the plan and in accordance with Sec. 1.409A-
3(j)(4)(ix)(C)(3), if Corporation U terminates the plan, the payment
under the plan may be accelerated, but may not be made within 12
months of the date of termination. Under the plan terms and
applicable law, if Corporation U terminates the plan, then it is
obligated to pay any earnings that accumulated through the date of
payment. Under applicable law, the plan constitutes a written
binding contract in effect on November 2, 2017, to pay $100,000 of
remuneration that Corporation U credited to the account balance on
December 31, 2016, plus any earnings credited on that amount through
November 2, 2018, which is equal to the amount Corporation U is
obligated to pay if it terminates the plan on November 2, 2017
(i.e., after that date, Corporation U is obligated to credit
earnings but not any further contributions). On November 2, 2017,
Employee E's account balance under the plan is $110,000. On November
2, 2018, Employee E's account balance under the plan would be
$115,000 (the $110,000 account balance on November 2, 2017, plus
$5,000 earnings on that amount). On June 30, 2019, Corporation U
pays Employee F $350,000, the account balance on June 30, 2019.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee F is a
covered employee for Corporation U's 2019 taxable year because
Employee F served as the PFO of Corporation U during the taxable
year. Because the January 4, 2016, agreement constitutes a written
binding contract to pay $115,000, this section does not apply (and
Sec. 1.162-27 does apply) to the deduction for the $115,000 portion
of the $350,000. Pursuant to Sec. 1.162-27(c)(2), Employee F is not
a covered employee of Corporation U for the 2019 taxable year, so
the deduction for the $115,000 portion of the $350,000 is not
subject to section 162(m)(1). The deduction for the remaining
$235,000 portion of the payment is subject to this section (and not
Sec. 1.162-27).
(xviii) Example 18 (Effect of increasing credits to an account
balance plan)--(A) Facts. The facts are the same as in paragraph
(g)(3)(xvii) of this section (Example 17), except that on January 1,
2018, Corporation U increased the amount it would credit to Employee
F's account on December 31, 2018 to $200,000. The amount of the
increase exceeds a reasonable, annual cost-of-living increase. On
June 30, 2019, Corporation U pays Employee F the account balance of
$455,000 (including earnings).
(B) Conclusion. If this Sec. 1.162-33 applies, Employee F is a
covered employee for Corporation U's 2019 taxable year. The January
1, 2018 increase in the amount credited to the account balance plan
is a material modification of the plan because the additional
compensation (the excess of $200,000 over $100,000) credited under
the plan is credited on the basis of substantially the same elements
or conditions as the compensation that would otherwise be credited
pursuant to the plan ($100,000), and it exceeds a reasonable, annual
cost-of-living increase. Because the plan is materially modified as
of January 1, 2018, and all payments under the plan are made on or
after January 1, 2018, the deduction for all payments under the plan
is subject to this section (and not Sec. 1.162-27).
(xix) Example 19 (Equity-based compensation with underlying
grants made prior to November 2, 2017)--(A) Facts. On January 2,
2017, Corporation T executed a 4-year employment agreement with
Employee G to serve as its PEO, and Employee G serves as the PEO for
the four-year term. Pursuant to the employment agreement, on January
2, 2017, Corporation T executed a grant agreement and granted to
Employee G nonqualified stock options to purchase 1,000 shares of
Corporation T stock, stock appreciation rights (SARs) on 1,000
shares, and 1,000 shares of Corporation T restricted stock. On the
date of grant, the stock options had no readily ascertainable fair
market value as defined in Sec. 1.83-7(b), and neither the stock
options nor the SARs provided for a deferral of compensation under
Sec. Sec. 1.409A-1(b)(5)(i)(A) and (B). The stock options,
[[Page 70390]]
SARs, and shares of restricted stock are subject to a substantial
risk of forfeiture and all substantially vest on January 2, 2020.
Employee G may exercise the stock options and the SARs at any time
from January 2, 2020, through January 2, 2027. On January 2, 2020,
Employee G exercises the stock options and the SARs, and the 1,000
shares of restricted stock become substantially vested (as defined
in Sec. 1.83-3(b)). The grant agreement pursuant to which grants of
the stock options, SARs, and shares of restricted stock are made
constitutes a written binding contract under applicable law. The
compensation attributable to the stock options and the SARs satisfy
the requirements of Sec. 1.162-27(e)(2) through (5) as qualified
performance-based compensation.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee G is a
covered employee for Corporation T's 2020 taxable year. Because the
January 2, 2017, grant agreement constitutes a written binding
contract, this section does not apply (and Sec. 1.162-27 does
apply) to the deduction for compensation received pursuant to the
exercise of the stock options and the SARs, or the restricted stock
becoming substantially vested (as defined in Sec. 1.83-3(b)).
Pursuant to Sec. 1.162-27(e)(1), the deduction attributable to the
stock options and the SARs is not subject to section 162(m)(1)
because the compensation satisfies the requirements of Sec. 1.162-
27(e)(2) through (5) as qualified performance-based compensation.
However, the deduction attributable to the restricted stock is
subject to section 162(m)(1) because the compensation does not
satisfy the requirements of Sec. 1.162-27(e)(2) through (5) as
qualified performance-based compensation.
(xx) Example 20 (Equity-based compensation with underlying
grants made prior to November 2, 2017 for which vesting is
accelerated)--(A) Facts. The facts are the same as in paragraph
(g)(3)(xix) of this section (Example 19), except that, on December
31, 2018, Corporation T modifies the grant agreement pursuant to
which grants are made to provide that the stock options, SARs, and
shares of Corporation T restricted stock are vested as of January 2,
2019. On January 3, 2019, Employee G exercises the stock options and
the SARs.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee G is a
covered employee for Corporation T's 2019 taxable year. The
modification of the January 2, 2017, grant agreement is not a
material modification. Because the January 2, 2017, agreement under
which grants were made constitutes a written binding contract, this
section does not apply (and Sec. 1.162-27 does apply) to the
deduction for compensation received pursuant to the exercise of the
stock options and the SARs, or the restricted stock becoming vested.
Pursuant to Sec. 1.162-27(e)(2)(iii)(B), the acceleration of
substantial vesting of the stock options and SARs is not an
impermissible increase in compensation to disqualify the
compensation attributable to the stock options and SARs from
satisfying the requirements of Sec. 1.162-27(e)(2) through (5) as
qualified performance-based compensation, so the deduction
attributable to the stock options and the SARs is not subject to
section 162(m)(1). However, the deduction attributable to the
restricted stock is subject to section 162(m)(1) because the
compensation does not satisfy the requirements of Sec. 1.162-
27(e)(2) through (5) as qualified performance-based compensation.
(xxi) Example 21 (Plan in which an employee is not a participant
on November 2, 2017)--(A) Facts. On October 2, 2017, Employee H
executes an employment agreement with Corporation Y to serve as its
PFO, and commences employment with Corporation Y. The employment
agreement, which is a written binding contract under applicable law,
provides that if Employee H continues in his position through April
1, 2018, Employee H will become eligible to participate in the NQDC
plan of Corporation Y and that Employee H's benefit accumulated on
that date will be $3,000,000. On April 1, 2021, Employee H receives
a payment of $4,500,000 (the increase from $3,000,000 to $4,500,000
is not a result of a material modification as defined in paragraph
(g)(2) of this section), which is the entire benefit accumulated
under the plan through the date of payment.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee H is a
covered employee for Corporation Y's 2021 taxable year. Even though
Employee H was not eligible to participate in the NQDC plan on
November 2, 2017, Employee H had the right to participate in the
plan under a written binding contract as of that date. Because the
amount required to be paid pursuant to the written binding contract
is $3,000,000, this section does not apply (and Sec. 1.162-27 does
apply) to the deduction for the $3,000,000 portion of the
$4,500,000. Pursuant to Sec. 1.162-27(c)(2), Employee H is not a
covered employee of Corporation Y for the 2021 taxable year.
Accordingly, the deduction for the $3,000,000 portion of the
$4,500,000 is not subject to section 162(m)(1). The deduction for
the remaining $1,500,000 portion of the payment is subject to this
section (and not Sec. 1.162-27).
(xxii) Example 22 (Material modification of annual salary)--(A)
Facts. On January 2, 2017, Corporation R executed a 5-year
employment agreement with Employee I to serve as Corporation R's
PFO, providing for an annual salary of $1,800,000. The agreement
constitutes a written binding contract under applicable law. In 2017
and 2018, Employee I receives the salary of $1,800,000 per year. In
2019, Corporation R increases Employee I's salary by $40,000, which
is less than a reasonable cost-of-living increase from $1,800,000.
On January 1, 2020, Corporation R increases Employee I's salary to
$2,400,000. The $560,000 increase exceeds a reasonable, annual cost-
of-living increase from $1,840,000.
(B) Conclusion ($1,840,000 Payment in 2019). If this Sec.
1.162-33 applies, Employee I is a covered employee for Corporation
R's 2018 through 2020 taxable years. Because the January 1, 2017,
agreement is a written binding contract to pay Employee I an annual
salary of $1,800,000, this section does not apply (and Sec. 1.162-
27 does apply) to the deduction for Employee I's annual salary
unless the change in the employment agreement is a material
modification. Pursuant to Sec. 1.162-27(c)(2), Employee I is not a
covered employee of Corporation R for the 2019 taxable year, so the
deduction for the $1,800,000 salary is not subject to section
162(m)(1). Even though the $40,000 increase is made on the basis of
substantially the same elements or conditions as the salary, the
$40,000 increase does not constitute a material modification of the
written binding contract because the $40,000 is less than or equal
to a reasonable cost-of-living increase applied to the $1,800,000
annual salary Corporation R owes under the agreement. However, the
deduction for the $40,000 increase is subject to this section (and
not Sec. 1.162-27).
(C) Conclusion (Salary increase to $2,400,000 in 2020). The
$560,000 increase in salary in 2020 is a material modification of
the written binding contract because the additional compensation is
paid on the basis of substantially the same elements or conditions
as the salary, and it exceeds a reasonable, annual cost-of-living
increase from $1,840,000. Because the written binding contract is
materially modified as of January 1, 2020, the deduction for all
salary paid to Employee I on and after January 1, 2020 is subject is
subject to this section (and not Sec. 1.162-27).
(xxiii) Example 23 (Additional payment not considered a material
modification)--(A) Facts. The facts are the same as in paragraph
(g)(3)(xxii) of this section (Example 22), except that instead of an
increase in salary, in 2020 Employee I receives a restricted stock
grant subject to Employee I's continued employment for the balance
of the contract.
(B) Conclusion. The restricted stock grant is not a material
modification of the written binding contract because any additional
compensation paid to Employee I under the grant is not paid on the
basis of substantially the same elements and conditions as Employee
I's salary. However, the deduction attributable to the restricted
stock grant is subject to this section (and not Sec. 1.162-27).
(xxiv) Example 24 (Modification of written binding contract to
provide for accelerated vesting)--(A) Facts. Employee J serves as
the PFO of Corporation Q for the 2017 through 2020 taxable years. On
July 14, 2017, Corporation Q and Employee J enter into an agreement
providing that Corporation Q will pay $2,000,000 to Employee J if
Employee J continues to serve as the PFO until the third anniversary
of the agreement (July 14, 2020). The agreement provides that
Corporation Q will make the payment on the date Employee J meets the
service requirement. The right to the $2,000,000 payment is subject
to a substantial risk of forfeiture as defined in Sec. 1.409A-1(d).
Under applicable law, the plan constitutes a written binding
contract in effect on November 2, 2017, to pay $2,000,000 to
Employee J if Employee J serves as the PFO through July 14, 2020. On
November 29, 2019, Corporation Q modifies the written binding
contract to provide for substantial vesting of the $2,000,000 on
that date and pays the $2,000,000 to Employee J.
(B) Conclusion. If this Sec. 1.162-33 applies, Employee J is a
covered employee for Corporation Q's 2019 taxable year because
[[Page 70391]]
Employee J served as the PFO of Corporation Q during the taxable
year. Because the July 14, 2017, agreement constitutes a written
binding contract to pay $2,000,000, this section does not apply (and
Sec. 1.162-27 does apply) to the deduction for the $2,000,000
unless the contract is materially modified. Pursuant to Sec. 1.162-
27(c)(2), Employee J is not a covered employee of Corporation Q for
the 2019 taxable year. The change in terms of the contract on
November 29, 2019, to accelerate vesting but to otherwise pay the
amounts under the original terms is not a material modification.
Accordingly, the deduction for the $2,000,000 is not subject to
section 162(m)(1).
(h) Effective/Applicability dates--(1) Effective date. These
regulations are effective on [DATE OF PUBLICATION OF THE FINAL RULE IN
THE FEDERAL REGISTER].
(2) Applicability dates--(i) General applicability date. Except as
otherwise provided in paragraph (h)(2)(ii) of this section, these
regulations apply to taxable years beginning on or after [DATE OF
PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER].
(ii) Special applicability dates--(A) Definition of covered
employee. The definition of covered employee in paragraph (c)(2)(i) of
this section applies to taxable years ending on or after September 10,
2018. However, for a corporation whose fiscal year and taxable year do
not end on the same date, the rule in paragraph (c)(2)(i)(B) requiring
the determination of the three most highly compensated executive
officers to be made pursuant to the rules under the Exchange Act
applies to taxable years ending on or after December 20, 2019.
(B) Definition of predecessor of a publicly held corporation--(1)
Publicly held corporations that become privately held. The definition
of predecessor of a publicly held corporation in paragraph
(c)(2)(ii)(A) of this section applies to any publicly held corporation
that becomes a privately held corporation for a taxable year beginning
after December 31, 2017, and, subsequently, again becomes a publicly
held corporation on or after [DATE OF PUBLICATION OF THE FINAL RULE IN
THE FEDERAL REGISTER]. Accordingly, the definition of predecessor of a
publicly held corporation in paragraph (c)(2)(ii)(A) of this section
does not apply to any publicly held corporation that became a privately
held corporation for a taxable year beginning before January 1, 2018,
with respect to the earlier period as a publicly held corporation; or a
publicly held corporation that becomes a privately held corporation for
a taxable year beginning after December 31, 2017, and, subsequently,
again becomes a publicly held corporation before [DATE OF PUBLICATION
OF THE FINAL RULE IN THE FEDERAL REGISTER].
(2) Corporate transactions. The definition of predecessor of a
publicly held corporation in paragraphs (c)(2)(ii)(B) through (H) of
this section applies to corporate transactions that occur (as provided
in the transaction timing rule of paragraph (c)(2)(ii)(I) of this
section) on or after [DATE OF PUBLICATION OF THE FINAL RULE IN THE
FEDERAL REGISTER].
(C) Definition of compensation. The definition of compensation
provided in paragraph (c)(3)(ii) of this section (relating to allocable
shares of partnership deductions for compensation paid) applies to any
deduction for compensation that is otherwise allowable for a taxable
year ending on or after December 20, 2019. However, this definition of
compensation does not apply to compensation paid pursuant to a written
binding contract that is in effect on December 20, 2019 and that is not
materially modified after that date. For purposes of this paragraph
(h)(3), written binding contract and material modification have the
same meanings as provided in paragraphs (g)(1) and (g)(2) of this
section.
(D) Corporations that become publicly held. The rule in paragraph
(d) of this section (providing that the deduction limitation of
paragraph (b) of this section applies to a deduction for any
compensation that is otherwise deductible for the taxable year ending
on or after the date that a privately held corporation becomes a
publicly held corporation) applies to corporations that become publicly
held on or after December 20, 2019. A privately held corporation that
becomes a publicly held corporation before December 20, 2019 may rely
on the transition rules provided in Sec. 1.162-27(f)(1) until the
earliest of the events provided in Sec. 1.162-27(f)(2).
(E) Transition rules. The transition rules in paragraphs (g)(1) and
(2) of this section (providing that this section does not apply to
remuneration payable under a written binding contract which was in
effect on November 2, 2017, and which is not modified in any material
respect on or after such date) apply to taxable years ending on or
after September 10, 2018.
0
Par. 4. Section 1.338-1 is amended by revising paragraph (b)(2)(i) to
read as follows:
Sec. 1.338-1 General principles, status of old target and new target.
* * * * *
(b) * * *
(2) * * *
(i) The rules applicable to employee benefit plans (including those
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137,
and 220), qualified pension, profit-sharing, stock bonus and annuity
plans (sections 401(a) and 403(a)), simplified employee pensions
(section 408(k)), tax qualified stock option plans (sections 422 and
423), welfare benefit funds (sections 419, 419A, 512(a)(3), and 4976),
voluntary employee benefit associations (section 501(c)(9) and the
regulations thereunder (26 CFR 1.501(c)(9)-1 through 1.501(c)(9)-8))
and certain excessive employee remuneration (section 162(m) and the
regulations thereunder (26 CFR 1.162-27 and Sec. 1.162-31));
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-26116 Filed 12-16-19; 4:15 pm]
BILLING CODE 4830-01-P
